China economy

Chinese exporters hit by trade war to get help as Beijing orders banks to lend more

Emphasis also on funding for smaller firms squeezed by deleveraging drive, and for domestic infrastructure projects, in attempt to stabilise growth

PUBLISHED : Monday, 20 August, 2018, 8:17pm
UPDATED : Monday, 20 August, 2018, 9:30pm

Beijing has instructed banks to step up lending to the struggling sectors of the Chinese economy, including exporters hit hard by heavy US tariffs as well as contractors and private enterprises squeezed by lack of access to credit.

In a circular released at the weekend, the China Banking and Insurance Regulatory Commission (CBIRC) vowed to improve the process that guides provision of additional money by the central bank through banks to the real economy, especially smaller firms hit hardest by current economic conditions.

The CBIRC said it would work with local governments and industry associations to help rally support for those exporters most affected by US tariffs.

In addition, banks and insurers were told to increase funding for domestic infrastructure projects so long as this did not increase local government debt.

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Demand for funding from local government financing vehicles should be met to prevent cash flow shortages threatening construction projects, the CBIRC said.

“For those meeting loan requirements but suffering temporary difficulties, [the government] should continue funding support, rather than blindly cutting off loans,” it said.

The circular is the latest step by the government to boost funding to the economy after the Politburo, the Chinese government’s prime decision-making body, set out a series of priorities for stabilising the economy at the end of last month.

The People’s Bank of China has already fine-tuned its monetary stance to add more liquidity to the financial market, while the Ministry of Finance is accelerating special bond sales to raise capital for local construction projects.

However, there is concern that the enhanced government financial support will go largely to state-owned enterprises, bypassing private firms, as happened in previous stimulus plans.

Small and medium-sized private firms, which employ the vast majority of the country’s labour force, have suffered the most from the government’s programme to reduce financial leverage and debt, as well as from the trade war with Washington.

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Liu Xuezhi, a senior analyst with the Bank of Communications in Shanghai, said a rise in liquidity was not yet obvious for private firms and exporters that have suffered declining external demand as a result of US sanctions.

So far, the government stimulus plan, he said, “mainly focuses on the stabilisation of domestic demand, infrastructure construction in particular, to shore up the economy. Investment has dropped too quickly in recent months.”

The investment growth rate slowed to a record low of 5.5 per cent in the first seven months of the year, according to government data released last week. The growth of infrastructure spending, largely backed by Beijing, plunged to 5.7 per cent in the January-July period from nearly 20 per cent a year earlier.

Given the government’s deleveraging drive, banks have been largely unwilling to lend to smaller and medium-sized private businesses, because of their higher credit risk and lack of any implicit government guarantee.

It remains uncertain whether government prodding will be sufficient to get banks to lend more to these firms, whose access to shadow bank financing is now largely blocked by the government deleveraging crackdown, Liu added.

Financing difficulties and high fundraising costs are decade-old problems for small and medium-sized companies in China.

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Ding Shuang, chief China economist at Standard Chartered, said it is a “reasonable choice” for banks to lend primarily to large and state-owned enterprises that enjoy stronger repayment capability, due in part to implicit government guarantees.

“It is contrary to market logic to demand [that banks] lend at a certain rate to small and private firms,” he said.

Beijing has introduced a number of measures in recent years to boost lending to these companies, including reducing the regulatory burdens for such lending, expanding their ability to borrow directly from the central bank and establishing a multibillion-yuan loan guarantee fund.

“Those, coupled with strong administrative measures, could improve the situation under the state-dominated banking system,” Ding said. “But it is not good for the commercial operations of banks.”

Instead, a more proactive fiscal policy, including a tax cut that boosts domestic demand, would be more useful in helping smaller firms, he argued.