Internet-led financial innovation key to structural reforms

China's monetary easing policy to ensure ample liquidity in the financial system is welcome, but the fact remains that only more Internet-driven financial innovation can help such a favorable financial environment boost the country's job-creating small businesses.

The first cut in the reserve requirement ratio in 2016 announced by the People's Bank of China on Monday was widely received as an encouraging sign that the authorities will adopt more expansive fiscal and monetary policies to support growth. The central bank's surprise move even enabled Chinese shares to shrug off disappointing manufacturing and service sector surveys to rebound on Tuesday.

As the latest sign of strong headwinds against the world's second-largest economy, China's manufacturing activities contracted for a seventh straight month in February while its service sector activities continued to slow down. Official data show China's Purchasing Managers' Index for the manufacturing sector fell from 49.4 in January to 49 in February, the lowest level since August 2012, and that for the non-manufacturing sector slid from 53.5 to 52.7.

The combination of such weak growth momentum, the recent plunge of the stock market and the need to sterilize the pressure ongoing capital outflows have put on liquidity should justify the reserve requirement ratio cut, in order to avoid unwanted monetary tightening.

But its impact on China's economic growth largely remains unknown. The average reserve requirement ratio's reduction from 17 percent to 16.5 percent, though, is estimated to release about 700 billion yuan ($106.80 billion) in base money supply. But opening the tap of liquidity alone will not ensure that numerous small businesses can get a needed financial shot in the arm. That is why the RRR cut has also sparked fears that increased money supply may add fuel to the surge of housing prices in the country's top-tier cities like Beijing, Shanghai and Shenzhen but do little to help other businesses.

The country's banking sector has long been dominated by large State-owned banks which tend to lend to big State-owned companies enjoying implicit guarantee from the government. But they have generally failed to meet the financing demand of many smaller companies and individuals, for traditional due diligence often makes it too expensive to accurately evaluate small companies' creditworthiness.

Fortunately, the recent rise of Internet banks in China has come to the rescue. It is reported that MYbank, a private lender backed by E-commerce giant Alibaba, has lent a total of 45 billion yuan (around $6.88 billion) in just eight months to farmers, merchants on Alibaba's online marketplace, restaurant owners and mom-and-pop stores, extending loans to 800,000 borrowers that have trouble accessing financing through traditional banks.

Alibaba's rival, Tencent, also runs a private lender called WeBank that focused on consumer credit and wealth management.

These new banks are among a group of private lenders approved by the Chinese banking regulator under a trial program to encourage lending to small and private businesses, as well as to rural residents.

The competitive edge of such Internet banks is obvious. On the one hand, neither lender has a physical presence, which means both can provide services online or through mobile applications with lower fixed costs. On the other hand, both project their ability to efficiently gather information on clients' creditworthiness based on their online activities.

Since such Internet banks are relatively new, they cannot claim to be well-prepared for all the risks that the banking sector could face before China's economic growth bottoms out. But their advantage in providing financial services to small companies that get little or no attention from traditional banks should be made full use of to help translate the accommodative monetary policy into a real and direct boost for small businesses.

If a boom in small businesses, most of which are in the service sector and can create jobs to absorb the shock of the reduction in industrial overcapacity, is vital to the success of China's economic transformation, more Internet-based financial innovation should be encouraged to benefit small businesses while related regulations are updated gradually.

The author is a senior writer with China Daily. zhuqiwen@chinadaily.com.cn