PBOC Unveils $60 Billion Plan to Aid Small Business Credit

(Bloomberg) — China’s central bank said it will temporarily purchase loans made to small businesses from some local banks, a new policy to boost the supply of lending to the real economy.

The plan will use 400 billion yuan ($56 billion) from a separate program to buy 40% of un-collateralized loans to small and medium-sized firms with maturities of at least six months made between Mar. 1 and Dec. 31, 2020, the People’s Bank of China (OTC:) said Monday.

Commercial lenders should repay the central bank the funds a year after the transaction. The lenders will continue to receive interest payments from the borrower and will bear any losses if the loans go sour, the PBOC said. The central bank will sign contracts with qualified local commercial lenders via a special-purpose vehicle, and the plan could boost banks’ un-collateralized loans to small firms by one trillion yuan, it said.

The central bank is trying to bring down borrowing costs across the economy to stimulate demand and help China grow out of the slump in first quarter caused by the pandemic. By taking loans to small businesses on to its balance sheet, the PBOC may help lower lenders’ capital requirements and thereby lower the cost of further lending.

While the authorities have cut policy rates multiple times this year, they’ve avoided the large-scale stimulus seen in other major economies to avoid aggravating the country’s debt problem. The central bank has announced a number of smaller policy changes.

The program “reflects policy makers’ top priority to support SMEs amid the aftershock of Covid-19,” while not willing to expand its balance sheet to flood the market, said Xing Zhaopeng, a markets economist at Australia and New Zealand Banking Group Ltd. in Shanghai. “We expect the PBOC will not end the program as it described in the statement. In fact, this starts the QE process to lend cheap funds directly to the real economy.”

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The central bank also announced Monday that small companies would be allowed to delay loan repayments to March 2021. Combined, the two new policies would make monetary policy more “direct” in increasing loans to the real economy and help stabilize funding flows to small firms and improve their access to credit.

  • Commercial banks are encouraged to improve their risk review system to make sure that un-collateralized loans to SMEs will increase as a proportion of all loans to those firms (defined as being companies with a credit line of 10 million yuan or less)
  • Commercial banks were encouraged to shift their business focus to real economy borrowers including medium- and small-firms from the property sector and local government financing platforms
  • Commercial banks were also asked to change other underwriting standards to prioritize SME loans
  • Companies receiving credit from the un-collateralized loans supporting program have to promise they’ll keep jobs stable

What Bloomberg’s Economists Say..

“We think the quota may expand further in the future, depending on how the economy is recovering from the impact of the coronavirus. The effectiveness of the policy move remains an important consideration — banks may still face constraints in regulatory requirements (such as capital adequacy) and risk-aversion sentiment.”

David Qu, Bloomberg Economics

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(Adds Bloomberg Economics An earlier version of this story was corrected to amend the date loans can begin to March 1 in 2nd paragraph.)

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