China Institutes New Policy To Boost Small Firm Lending

Faced with a slowing economy and a trade dispute with the U.S., China’s central bank on Wednesday (Dec. 19) announced a new policy tool aimed at boosting lending to small and private companies.

Reuters, citing the government of China’s website, reported that the country will roll out a targeted medium-term lending facility which it said will provide a “long-term stable source of funding for financial institutions based on the growth of their loans for small and private firms.”

The central bank noted that big commercial banks, joint stock banks and city commercial banks that show support for the economy and meet macro-prudential requirements can apply for the lending facility. The targeted medium-term lending facility (TMLF) will have a maturity of one year, but Reuters noted that banks can extend it for two more years. The interest on the one-year TMLF is 3.15 percent, which is 15 basis points lower than the interest rate on the medium-term lending facility.

The central bank in China went on to note that it plans to continue to put in place a “prudent and neutral” monetary policy that will ensure liquidity. It also said its future targeted policies will be more effective.

The move on the part of China comes as economic growth is slowing in the country and Beijing is embroiled in a trade war with the Trump administration. Pointing to economic data issued last week, Reuters reported that November factory output and retail sales were sluggish, which indicated that more bad news could be coming for the remainder of the quarter.

In addition to announcing the targeted medium-term lending facility, the People’s Bank of China said it will increase the relending and rediscount quota by $14.50 billion, which will provide financing for small enterprises. China’s government has been offering support to small companies and private enterprises given their importance to the country’s overall economic growth and employment amid the trade war with the U.S.