Coronavirus: China consumers, small firms shy away from borrowing even as Beijing readies more support

People’s Bank of China (PBOC) is expected to again cut banks’ reserve requirement ratio (RRR) in the coming days as its continues to try to boost loans

Households in China reduced debt in February because of fear over the outlook due to the impact of the coronavirus on the economy

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China’s new loans stood at 906 billion yuan (US$130 billion) in February, down sharply from a record 3.34 trillion yuan (US$480 billion) in January. Photo: Reuters

Published: 7:30pm, 12 Mar 2020Updated: 10:40pm, 12 Mar 2020

Surprisingly low new lending by Chinese banks in February suggested that fears about the economic impact of the coronavirus on an already weak economy had caused households and small and microenterprises to avoid new borrowing despite the strong efforts by the central bank.

China’s cabinet, the State Council, on Wednesday called for a further reduction in the reserve requirement ratio (RRR) – the amount of money banks are required to set aside at the central bank – to free up cash to lend to small firms, with analysts expecting the change to be implemented soon.

Lu Ting, chief China economist at Nomura Bank, predicted that the cut could come as early as Friday, adding around 800 billion yuan (US$115 billion) of more funds into the banking system. He also expects the People’s Bank of China (PBOC) to cut some of its official benchmark interest rates.

“That said, we don’t think Beijing has the incentive or the capacity to launch another big [monetary] stimulus this year due to much more limited policy space than in previous years and elevated [consumer] inflation,” Lu said, adding that easing measures were unlikely to exceed those seen in 2015-2016, when the PBOC aggressively cut benchmark lending rates and kept extra liquidity in the banking system for a prolonged period to offset the impact of a sharp stock market decline on the economy.

In January, the PBOC cut the reserve requirement to 12.5 per cent from 13.0 per cent for big banks, and to 10.5 per cent from 11.0 per cent for small and medium-sized banks.

In addition, the PBOC provided 800 billion yuan (US$115 billion) in extra funds to commercial banks in February after the outbreak to further boost lending to farms and small businesses. China’s three government-controlled policy banks, whose lending supports Beijing’s key policy initiatives, were also asked to increase lending to the economy by 350 billion yuan (US$50 billion).

Progress in controlling the virus outbreak has allowed Beijing and its local governments to start dismantling some citywide lockdowns and travel restrictions that brought much of the world’s second largest economy to a standstill over the past month.