China’s central bank faces a problem getting nation’s lenders to actually lend more money

The People’s Bank of China is tackling a problem it rarely had to worry about until recently - persuading banks to lend the money they have.

Thanks to the central bank turning on the liquidity taps, the cost for banks to borrow from one another is now lower than the cost to borrow from the PBOC, but a large chunk of those funds is sitting idle. That money isn’t feeding into the wider economy, especially not to cash-strapped smaller firms, as lenders are unwilling to make loans or buy risky bonds.

With China in a worsening trade war with the US and also trying to control already large debts, ensuring funds get to needy companies is vital to sustain growth. Since the start of August, the central bank has begun softening rules to encourage lending, and a top-level meeting chaired by vice-premier Liu He called for more efforts in “unclogging” the transmission mechanism, underlining the government’s sense of urgency.

Their efforts have had some initial success - China’s new yuan loans rose more than expected to 1.45 trillion yuan (US$210 billion) in July, according to preliminary data released by the Banking and Insurance Regulatory Commission over the weekend.

Still, that only covers the credit extended by banks, and doesn’t include financing from the equity and bond markets or the shadow banking sector.

Whether liquidity offered by the central bank can be utilised depends on the “willingness and capacity” of both the supply and demand sides, the PBOC said in its quarterly report last week. Joint action from monetary, fiscal and regulatory authorities is needed to ensure better transmission, it said.