China’s Central Bank Steps Up Effort to Boost Lending

(Bloomberg) -- China's central bank has started actively encouraging banks to extend more credit by taking a softer stance on loan quotas, people familiar with the matter said, as authorities ratchet up efforts to bolster a cooling economy.

The People's Bank of China has delivered the message via so-called window guidance, said the people, who asked not to be named discussing private information. The central bank hasn't provided specific targets, but it indicated a willingness to be more flexible on banks' government-imposed lending caps, the people said.

While China has taken several steps to free up credit in recent weeks, the central bank's latest interactions with lenders suggest official efforts have intensified. One executive at a large state-owned bank said the firm exceeded its year-to-date lending quota, judging that the PBOC would be less strict in enforcing the cap. A smaller bank focused on small-business lending had its quota raised by more than 50 percent in August from the previous month, a person with knowledge of the matter said.

Less than two years after Xi Jinping's government began a campaign to curb risky lending practices and rein in China's record debt burden, regulators are tapping the brakes on their crackdown as the $12 trillion economy slows and Donald Trump threatens to slap more tariffs on Chinese goods. More flexible quotas would make it easier for banks to boost small-business lending from the weakest pace in three years and offset an unprecedented contraction in China's shadow-finance sector. Increased lending would also help improve sentiment in the country's equity and credit markets, which have slumped amid trade jitters and rising defaults.

“Loosening of lending will buttress the economy and prevent it from weakening further,” said Tang Jianwei, a Shanghai-based economist at Bank of Communications Co.

The PBOC couldn't immediately comment when contacted by Bloomberg News. In a statement late on Wednesday following its semi-annual work conference, the central bank said it encourages financial firms to boost efforts to support the real economy and reduce financing costs.

Chinese authorities have already taken several steps to ease financial conditions and bolster the economy, while stopping short of broad-based fiscal or monetary stimulus.

The moves have included three cuts to banks' reserve-ratio requirements this year, relaxed capital restrictions for some lenders, and new rules for the shadow-finance industry that proved less restrictive than many analysts had anticipated. A statement from China's top governing body on Tuesday emphasized the need to make economic policies more flexible, adding to signs that Xi's government is increasingly focused on supporting growth.

In China, the central bank sets an undisclosed quota for overall credit growth and decides how much each bank can lend by looking at metrics including capital adequacy ratios, liquidity conditions and provisions for bad loans -- part of its so-called macro prudential assessment framework.

Higher quotas, or relaxed enforcement of existing quotas, would allow some banks to take fuller advantage of recent policy tweaks that reduced their capital requirements.

“Banks have decent capacity to lend, with abundant liquidity in the system and the regulators relaxing quota and lending rules,” said Aidan Yao, a senior economist at AXA Investment Asia Ltd. in Hong Kong. However, they still prefer lending to the public sector, so it isn't yet clear how effective the government's measures will be, Yao said.

While critics of a more relaxed approach worry that it could set back efforts to put China's debt on a more sustainable path, investors with shorter time horizons would likely cheer any effort to ease lending constraints. Chinese companies are defaulting on domestic bonds at a record pace, sending one gauge of corporate credit spreads to the highest level in three years in July.

At the same time, losses in Chinese bank stocks this year helped push the Shanghai Composite Index into a bear market. While the benchmark gauge has climbed about 3 percent from its July low, the market value of Chinese shares is still down about $2 trillion from a January peak.

--With assistance from Helen Sun, Yuling Yang and Miao Han.

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net;Zhang Dingmin in Beijing at dzhang14@bloomberg.net;Heng Xie in Beijing at hxie34@bloomberg.net

To contact the editors responsible for this story: Sam Mamudi at smamudi@bloomberg.net, Michael Patterson

With assistance from Editorial Board