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The People’s Bank of China (PBOC), China’s central bank, reports to the State Council and is part of the overall government structure. Photo: Reuters

China’s government tells banks to ‘increase financial support’ for private firms to aid slowing economy

  • Beijing issues rare directive telling lenders and financial regulators to help boost growth after 2018 cooled to its slowest rate in 28 years
  • New instructions reflect underlying anxiety among leaders over economic prospects amid the trade war with the United States

China’s top leadership has increased the pressure on lenders and financial regulators by urging them to do more to provide financial support to small and private businesses in a move aimed at keeping the slowing economy on track and maintaining social stability amid the trade war with the United States.

Banks, local governments and regulators have been urged to change the behaviour of commercial banks, who have only been offering lukewarm financial support to private borrowers.

“Financial regulators must enhance supervision, while fiscal authorities also must make full use of fiscal and tax policy and play its role as investor of state-owned financial institutions,” said the joint circular by the Communist Party Central Committee and the State Council.

“All the provincial governments also need to take their responsibilities and take relevant measures to lift the financing support for private firms.”

The key policy guidelines, for example, ask China’s central bank to lower the required reserve ratio so that banks will have more funds available to lend.

On Friday, data showed that new yuan loans in January hit an all-time high at 3.23 trillion yuan (US$477 million), showing the banks are already in a mode of frenzied lending.

The People’s Bank of China (PBOC), China’s central bank, reports to the State Council and is part of the overall government structure.

The banking watchdog, the China Banking and Insurance Regulatory Commission, meanwhile, were told to be more tolerant to non-performing loans so that banks will be more willing to grant loans to private borrowers.

The policy document came at a time when China’s economy is cooling quickly amid the trade war with the United States, reflecting underlying anxiety among the top decision makers in Beijing over growth prospects.

It also showcased Beijing’s efforts to help the private sector, which contributes more than 80 per cent of the country’s employment and over 90 per cent of new jobs created each year.

“It’s clear that supporting and channelling finance to the private sector is very high on the agenda, for economic, political and public relation reasons,” said Louis Kuijs, head of Asia economics at Oxford Economics.

The funding difficulty and high financing costs are decade-old problems for small and private firms in China, who are unable to obtain bank credit as easy as state-owned enterprises.

US Treasury Secretary Steven Mnuchin (left), US trade representative Robert Lighthizer (centre) met Chinese Vice-Premier Liu He this week in Beijing. Photo: Reuters

While questions remain over its implementation, analysts said the new policy guidelines do indicate an urgency as economic growth will test the growth floor of 6.0 per cent in the first quarter of 2019 having slowed to 6.6 per cent in 2018.

Raymond Yeung, chief Greater China economist at ANZ Bank, said the high-profile circular revealed the fact that small- and medium-sized firms (SMEs) face a deteriorating business environment.

They were hurt by the country’s financial deleveraging in the first half of last year before seeing their orders and cash flows greatly challenged as the trade war with the United States escalated, said Yeung.

Yeung noted, that in theory, it would be easier for China’s state-controlled banking system to solve the problems

“The question is who’s going to the pay the bill eventually. If the government pays the bill, how long can it endure?” he said, warning of the governments tendency to interfere in business operations.

The PBOC has already injected a significant amount of liquidity through earlier cuts to the required reserve ratio and differentiated tool for SMEs, while the Ministry of Finance is expected to lower the value added tax rate and the corporate contribution to the pension fund.