China boosts SME lending with reserve cut as markets fall on trade fears

By Jill Shen
2 min read
The Shanghai headquarters of the People's Bank of China, China's central bank, is at the Lujiazui Financial District in Pudong, China. (Image Credit: TechNode/Eugene Tang)
The Shanghai headquarters of the People’s Bank of China, China’s central bank, is at the Lujiazui Financial District in Pudong, China. (Image Credit: TechNode/Eugene Tang)

In an aim to lift the sagging economy, China’s central bank said Monday that it will cut the reserve requirement ratio (RRR) for small- and medium-sized banks, freeing up around RMB 280 billion (around $41.4 billion) for loans to the country’s startup companies and private businesses.

The People’s Bank of China (PBOC) said for county-level rural banks with assets below RMB 10 billion ($1.5 billion), the RRR will be reduced to 8%. This is in line with the rate at rural credit cooperatives (RCCs), a credit union sanctioned by the PBOC to provide credit in rural areas to support agriculture that has been in place since the 1950s.

Authorities expect the new policy, starting May 15, will be applicable to around 1,000 small banks, and will release RMB 280 billion ($41.5 billion) in long-term funds into the market. “All the funds unlocked will be loaned to private and small companies,” the statement said.

“The interest rate for loans is fairly high to small businesses. Local banks charge at least 7% for credit-based loans,” (our translation) said Wang Xiaocai, a Hangzhou-based private business owner said Monday when contacted by TechNode.

China’s central bank dictates three tiers for the RRR: 13.5% for large-sized commercial banks, 11.5% for medium and small local banks, and 8% for county-level rural financial institutions.

The move followed immediately after US President Donald Trump on Sunday threatened additional tariffs on $200 billion worth of Chinese imported goods by the end of this week. “The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!” he said in a tweet.

Trade-related concerns weighed on the Chinese stock market. The Shanghai Composite slumped 5.6% on Monday, the biggest one-day loss in the past three years. Shenzhen Composite fell 7.6%, with the shares of telecommunications giant ZTE falling 10.0% to RMB 28.94 by market close.

The policy was Beijing’s latest as it moves to lend support to local business owners struggling amid an economic downturn over the past few months. Chinese Premier Li Keqiang said in March during the country’s Two Sessions meetings that China will “remove unreasonable barriers and restrictions” to help small- and medium-sized enterprises raise money.

The Chinese government is also working on a business credit scoring system which includes records of penalties and blacklists, as well as tax payments and utility bills to ensure creditworthy companies get access to funding. Li said that financing costs for small enterprises this year should be lowered another 1% from 2018 levels.

However, Chinese banks face a rising number of bad loans. Industrial and Commercial Bank (ICBC) reported an increase of RMB 5.2 billion in non-performing loans in the first quarter of 2019, which was the largest quarterly increase over the past three years. Bad loans at China Construction Bank rose by RMB 6.6 billion, the highest since 2016, reported Bloomberg.