The View | How the People’s Bank of China is changing direction and going all out to save the private sector

Hao Zhou says the Chinese central bank’s new policy tools are clearly meant to encourage banks to extend credit to small businesses. It is a striking change in policy direction, after years of focusing on state-owned enterprises

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A 100 yuan banknote is placed into a basket at a food exhibition in Shanghai. As the Chinese economy weakens, the central bank is offering banks a carrot to extend more credit to small and medium-sized enterprises. Photo: Bloomberg

Published: 3:00pm, 6 Feb 2019Updated: 10:24pm, 6 Feb 2019

While the market is trying its best to guess how many cuts in the reserve ratio requirement to expect in China this year, the Chinese central bank has managed to tweak its strategy. Facing the pressure of a slowdown in the Chinese economy and dissatisfaction among corporations, especially private firms, the People’s Bank of China rolled out two new monetary policy instruments in late January.

On January 23, the Chinese central bank deployed its targeted medium-term lending facility for the first time, with tenors of up to three years and an interest rate that is 15 basis points lower than that on medium-term lending facility loans. The PBOC has stated that the new lending tool is directed at encouraging commercial banks to provide credit support to private and small firms. In other words, it is offering banks a carrot to increase their risk exposure to the private sector.

Just one day later, the PBOC announced the creation of another new instrument, the “central bank bills swap”. The scheme allows financial institutions that own perpetual bank capital bonds to swap them with PBOC bills. The bills have a tenor of up to three years, and financial institutions will still get yields on the perpetual bonds during this period.

Chinese regulators had just given commercial banks the green light to issue perpetual bonds and strengthen their capital positions, so as to encourage them to extend more credit to the economy, especially private companies. With the central bank bills swap, the PBOC is actually providing credit enhancement to facilitate the issuance of perpetual bonds and improve the efficiency of monetary transmission.

While the market may be focusing on whether the new policy tools will be effective in boosting lending to the private sector, what really strikes me is that the new measures reveal a new direction in China’s monetary policy.

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.css-1m2rp1p{color:#34b8b5;}The View | How the People’s Bank of China is changing direction and going all out to save the private sector

The View | How the People’s Bank of China is changing direction and going all out to save the private sector