Internet-led financial innovation key to structural reforms

An advertisement of Alibaba's financial arm Ant Financial in Hangzhou, capital of East China's Zhejiang province. [Long Wei/For China Daily]

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.