China orders banks to ‘improve political positioning’ and boost lending after October financial data disappoints

China’s central bank on Thursday ordered financial institutions to improve their “political positioning” and ensure adequate financing support for the real economy.

Financial institutions are responsible for adopting effective measures that create a sound environment for the country’s economic stabilisation, the People’s Bank of China told major banks at a credit meeting in Beijing.

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“All financial institutions must improve their political positioning to stay fully in line with the [Communist] Party Central Committee led by [President] Xi Jinping, and assist in serving the real economy,” the central bank said in a statement posted on its website.

The strongly worded statement comes after macroeconomic data for October released this week – particularly weak monetary and lending figures – continued to point to a gloomy outlook for the economy.

New loans in October fell by about half to 677 billion yuan (US$97.42 billion) from 1.38 trillion yuan in September, while aggregate financing, a broad measure of the country’s credit support for the real economy, shrank by about two-thirds to 728.8 billion yuan.

“Firms that experienced strong business expansion in previous years continue to face financing difficulties and high costs, as both [China’s} internal and external situations are complex and changing rapidly, ” said the statement.

The PBOC is among a number of government ministries scrambling to enact measures to offset the affects of the US-China trade war on the country’s economy, after the top leadership in Beijing vowed at the end of July to stabilise the economy, investment and trade.

Difficulties raising funds for investment and operations have been particularly acute for private-sector companies, whose borrowing does not include an implicit government guarantee, as does borrowing by state-owned enterprises. And at listed companies that pledged their shares as collateral for loans, funding difficulties have been exacerbated by a plunge in the stock market, as banks have demanded they increase the number of shares acting as collateral.

The government has called on banks to support well-run companies facing short-term liquidity difficulties, but the October new loan data suggests the banks are not being as supportive as the government wants.

The country’s fixed-asset investment growth plunged to 5.3 per cent in the January-August period, the lowest growth rate since data began to be published in 2003. It bounced slightly to 5.7 per cent in the January-October period, helped by the PBOC cutting the required reserve ratio – the amount of money banks are required to hold at the central bank – four times so far this year.

PBOC governor Yi Gang, who chaired the meeting, also stressed the need for banks to support small, private sectors companies, who are most susceptible to financing difficulties, given that the government’s programme to reduce indebtedness has largely shut the informal shadow banking funding channels these firms used to get capital.

“Financial institutions must make full and the best use of [government] incentive measures … to ensure [these firms’] commercial sustainability,” Yi was quoted as saying.

Iris Pang, chief Greater China economist at ING Bank, said October marked a policy turning point, with top Chinese leaders promising publicly that the government would assure the future of the private economy and help to alleviate its burdens.

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However, such support will not show up immediately in improved economic performance, said Pang. “It is difficult for liquidity to reach the real economy, private firms in particular.”

However, the situation should improve gradually in the coming months as the central bank is committed to improving the lending process, so that the liquidity it creates reaches companies in the economy. “This support will continue as long the trade war goes on,” Pang added.

Yi chaired the meeting as director general of the office of the State Council’s Financial Stability and Development Committee, the regulatory coordinating agency headed by Vice-Premier Liu He, the top economic aide of President Xi Jinping, according to the statement.

The message to bankers suggests a consensus has been reached among top policymakers on coordinated efforts to deal with business financing issues.

In late September, Yi called in major financial regulators, executives of state-owned banks and economists to talk about how to guide financial market expectations. At that time, the A-share index was falling rapidly, exacerbating a shareholder cash flow crisis at home and fears of an escalating trade war externally.