China Seeks To Encourage Credit Flows With Loans

To help stimulate credit flows to local governments and companies, The People’s Bank of China has injected 149 billion renminbi – or $22 billion – into the banking system. The government made the move on Friday (Aug. 24) by making loans to commercial banks, Financial Times reported.

China made use of a medium-term lending facility to provide commercial banks with loans for a duration of one year at a 3.3 percent interest rate. But since reverse repos of 90 billion renminbi matured on Friday (Aug. 24), the net injection was only 59 billion renminbi. The goal behind the move is to flatten the country’s yield curve and provide a supply of cash to help lenders provide funds for long-term corporate and government bond investments.

“Continuing to increase medium- and long-term liquidity matches with local (government) debt issuance,” CITIC Securities Chief Fixed-Income Analyst Ming Ming wrote. “The central bank has taken note of the negative impact on liquidity from the recent acceleration of special-purpose local bonds.”

The news comes as Chinese regulators are hoping to give a boost to small business (SMB) lending by telling banks to cut interest rates for SMB borrowers, according to reports in Reuters from early July. Two unnamed sources said that regulators have told banks to “significantly cut” lending rates for small businesses in the third quarter of the year, compared to first quarter rates.

Reports said China is in the midst of efforts to mitigate economic uncertainty and financial risks linked to a trade war with the U.S. Economists are warning that the trade disputes could slow economic growth in China. Small businesses are caught in the crosshairs of that trade war, according to the National Small Business Association in the U.S.

At the same time, the economy has suffered from regulators’ ongoing crackdown on risky lending, which has driven up corporate lending costs in the traditional banking center. The unnamed sources said the China Banking and Insurance Regulatory Commission (CBIRC) issued a non-public notice late in June asking banks to increase real-time lending rate monitoring.