Economy May 26

China moves to further lower enterprise finance costs

New guideline orders banks to be fair when pricing loans amid unprecedented post-coronavirus stimulus measures

by Nadeem Xu
China lowers enterprise financing costs again
Reduced rates on business loans for smaller enterprises are included in new guideline.

(ATF) Chinese authorities have unveiled guidance to further reduce financing costs for enterprises, according to an official circular released on Monday.

The announcement, issued jointly by six departments including the China Banking and Insurance Regulatory Commission, will take effect on June 1.

The move aims to better facilitate the high-quality development of the real economy, while protecting companies' right to be informed, make their own choices and trade fairly, said the circular.

Under the new guideline, banks should further cut fees and specify charges to lower the financial burden on enterprises. Practices such as forcing companies to deposit a part of their loans or make deposits as preconditions for credit, as well as bundle sales of financial products, will be strictly prohibited.

China’s central bank and financial regulators have taken extraordinary measures to boost an economy ravaged by the coronavirus crisis. Trillions of yuan-worth of bonds have been sold in advance of issuance schedules to inject liquidity into the financial system so it can be leant to struggling firms.

Banks are encouraged to carry out credit audits in advance to boost lending efficiency, according to the document. In an effort to keep companies' borrowing costs at an appropriate level, they’ll not be permitted to raise credit enhancement requirements or hike loan rates unreasonably.

The guideline emphasised that banks should stop providing "zombie enterprises" with credit support and instead ensure sufficient loans are accessible to companies with capital needs.

In addition, efforts will be undertaken to enhance the management of third-party institutions in the lending process, improve credit enhancement procedures and strengthen internal control and supervision, according to the guideline. 

Central bank

·      The People's Bank of China (PBoC) Tuesday launched the fifth central bank bill swap (CBS) operation of the year. The operation volume for the current period is 5 billion yuan ($710 million), with a period of three months. A fixed-rate quantity bidding is conducted for primary dealers of open market business, with a rate of 0.1%. The first settlement date is May 26 and the maturity date is August 26.

·      The central bank said it has lowered the deposit reserve ratio 12 times since 2018, releasing about 8 trillion yuan ($1.1tn) of long-term funds.

Of this amount, four tranches of 3.65tn yuan were released in 2018, five of 2.7tn yuan in 2019, and three of 1.75tn yuan this year.

Lowering deposit ratios frees up cash that banks would otherwise be regulated to keep aside to cover bad loans and other debts. This has been done at times of stressed bank liquidity, to aid struggling small and medium-sized enterprises and to reduce social financing costs.

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