On May 30, the State Council made a detailed plan for the financial work during the second half of the year. The plan seems to stress enhancing the capability of financial services for the real economy, but in fact it sets the tone for the central bank's monetary policy in the second half of the year. It is also innovative in strengthening "directional drop quasi", lowering the financing cost, and optimizing bank credit.

More lenders make RRR cuts

Reserve ratio cuts to tackle slowdown

First, the so-called directional drop quasi means a directional reduction of the reserve requirement ratio. In the case of China's downward economic growth, adjustment of the real estate market, and the increasing risk of default by Chinese enterprises, directional drop quasi means that the Chinese central bank is unlikely to change the present moderately tight monetary policy and will only fine tune different bank reserve ratios. Thus, the debate over the central bank's expected reduction of the reserve ratio has come to a halt, meaning a lower possibility of an overall reduction of reserve requirement ratios and loan interest rates in the second half of the year.

Meanwhile, directional drop quasi also means that in the case of a tight control of credit and social financing scale, a directional easing policy will be adopted to support the development of the real economy, the development of agriculture as well as small and micro businesses in particular.

Also, directional drop quasi is a way to regulate China's financial market. In the early years, the fast growth of China's interbank market was related to the excessive use of the interbank market by quite a few small and medium banks as well as financial institutions. Due to the lack of available loans, caused by excessive expansion, these banks had to go to the interbank market for short borrowing and long lending, thus causing a serious maturity mismatch of their assets. Any trouble in the market will cause turbulence in the interbank market. That was the cause of the "money shortage" in 2013. Adopting a directional easing policy is meant to encourage small and medium-sized banks to make themselves accessible to the real economy and to small and micro businesses.