Starting to Feel Like China's Got a Handle on Things?

(Bloomberg Opinion) -- About 80,000 infected cases and 3,000 deaths later, the one lesson China has learned from the coronavirus outbreak is that it's very contagious and highly disruptive. Now Beijing can teach the Federal Reserve a thing or two about how to contain its financial destruction.

Fed Chairman Jerome Powell may have thought he was ahead of the curve by cutting rates 50 basis points before the central bank's scheduled March meeting. Yet traders were unimpressed by Powell's reluctance to go further, which sent the S&P 500 Index 2.8% lower Tuesday. The Chinese yuan strengthened 0.68% against the U.S. dollar in Asian trading, the most this year.

They have a point. The headlines may sound nice, but questions remain about whether this transmission mechanism works, especially for smaller businesses.

In China, this is the sector most affected by the outbreak. For one, these companies don't have much sway over the supply chain, even for items as simple as face masks and hand sanitizer. Large corporations such as Apple Inc. supplier Foxconn Technology Co. have started their own mask assembly lines just to meet its workers' needs. That option simply isn't available if you are sub-scale. And while bigger companies are largely back in operation, two-thirds of smaller ones still couldn't get their employees to work as of last week, according to Beijing's own government briefing.

The situation could be even more dire in the U.S., where small and medium-size businesses are less profitable and more indebted.

In its latest global financial-stability assessment, the International Monetary Fund found that while Chinese SMEs remain highly profitable — and large, state-owned enterprises are economic drags — the situation is just the opposite in the U.S. American SMEs are in the worst financial shape among countries in the survey, which looked at more than 1.3 million companies across major global economies. Over 60% of SME corporate debt is issued by borrowers that don't make enough profit to cover their annual interest payments. In times of distress, it's unclear that banks and the private-loan market will allow smaller businesses to refinance.

Welcome to China, where bureaucrats are now forcing their banks to extend loans to SMEs. In addition to cutting the new benchmark rate, the People's Bank of China has set up a re-lending facility aimed at smaller businesses, dictating that banks must not issue loans above 4.55%, a very generous level considering the loan prime rate — that is, the rate banks offer to their best corporate clients — is 4.05%.

Meanwhile, to get the financial plumbing going, Beijing is tweaking all sorts of rules, making it easier for companies to issue bonds and raise funds via equity follow-on offerings. To prop up its credit markets, banks' wealth-management units no longer require first-time retail investors to go into local branches for in-person risk assessments. You can just open accounts online and start buying. In February, mutual funds and ETFs raised over 100 billion yuan ($14.4 billion), the most since June, 2018, which has helped China's stock market stage a V-shaped rebound. 

I'm not saying that China is doing everything right, and many of its emergency policies could become additional risks to financial stability. But you've got to give Beijing credit for being creative and throwing the kitchen sink at the virus. The Fed, meanwhile, comes across as ambiguous and hesitant. At the press conference following the announcement, Powell described the current policy stance as “appropriate,” and that future changes depend on “the flow of events” and “a range of things.”

Last September, when the Fed somehow botched a critical market rescue operation — its first overnight repurchase agreement operation in a decade — traders in China were perplexed. Open market operations have become commonplace in the mainland, and the central bank is designing sophisticated, new tools to help its banks shore up capital and guide them to targeted lending.

Blanket interest cuts won't kill the virus and are only likely to benefit the rich and powerful. That's probably why Bernie Sanders's populist message is resonating with small business owners in the aftermath of the global financial crisis. The Fed needs to get creative and more targeted in its market rescue.

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

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