China releases US$108b to ensure lending for small firms

CHINA’S central bank said yesterday that it will cut the amount of cash that some banks must hold as reserves by 50 basis points, releasing US$108 billion in liquidity, to accelerate the pace of debt-forequity swaps and spur lending to smaller firms.

The reserve reduction, the third by the central bank this year, had been widely anticipated by investors amid concerns over market liquidity. But the 700 billion yuan (US$108 billion) in liquidity that the central bank said will result from the reduction in reserves was bigger than expected.

The move is an implementation of decisions made at a State Council executive meeting last Wednesday, the central bank said. The meeting decided targeted cuts in banks’ reserve requirement ratios and other monetary policy tools will be used to boost credit supply to small firms and keep economic growth in a reasonable range.

Economists are not ruling out further reserve reductions for the rest of the year as borrowing costs rise due to China’s clampdown on leverage in the financial system, a campaign now in its third year.

The People’s Bank of China said yesterday that the latest targeted cut in some banks’ reserve requirement ratios — currently 16 percent for large banks and 14 percent for smaller banks — will take effect on July 5.

The PBOC said the cut will release about 500 billion yuan for the country’s five large state banks and 12 national joint-stock commercial banks. Lenders are encouraged to use the money to conduct debt-forequity swaps.

China’s policy-makers have been pushing for debt-for-equity swaps since late 2016 to ease pressure on firms struggling with their debts.

The country’s top banks have rushed to sign deals with state-owned enterprises to ease their debt burden and give them time to turn around their business and improve their creditworthiness.

The latest reserve requirement ratio cut will also release about 200 billion yuan in funding for small and medium-sized banks to increase lending to credit-strapped small businesses.

The combined 700 billion yuan liquidity injection exceeded market expectations of 400 billion yuan. In the PBOC’s last targeted reserve cut in April, 400 billion yuan of net liquidity was released.

“The intensity of the move exceeded market expectations,” said Wang Jun, Beijing-based chief economist at Zhongyuan Bank.

“This move will help support the real economy and stabilize financial markets. We’ve seen rising debt defaults and funding strains on small firms, as well as a sharp adjustment in the capital market.”

But the latest reserve cut signals a “policy fine-tuning,” not a policy reversal, Wang said.

The central bank said yesterday that it will keep monetary policy prudent and neutral.

The announcement followed the worst weekly loss in the Chinese stock market since early February.

The Chinese yuan on Friday also fell to its lowest versus the US dollar in more than five months, though it has remained firm against a basket of trading partners’ currencies, and a sharp depreciation is not in the cards.

Borrowing costs up

China’s financial risk clampdown has slowly pushed up borrowing costs, and is restricting alternative, murkier funding sources for companies such as shadow banking.

Strained liquidity conditions have caused a growing number of credit defaults with private companies facing mounting refinancing risks. Latest official surveys also showed tight funding has hit smaller manufacturers.

The weighted average lending rate for non-financial firms, a key indicator reflecting corporate funding costs, rose 22 basis points in the first quarter to 5.96 percent, PBOC data showed. That compared with a total of 47 basis points in 2017.

Policy-makers have been trying to strike a delicate balance between the need for tougher supervision and reforms and ensuring the stability of the financial system, while keeping economic growth on track.

ANZ Research said it still expects another 50-basis-point reserve requirement ratio cut in October.