PBOC Unveils $60 Billion Plan to Aid Small Business Credit

(Bloomberg) -- China's central bank said it will temporarily purchase loans made to small businesses from some local banks, a new policy to boost the supply of lending to the real economy.

The plan will use 400 billion yuan ($56 billion) from a separate program to buy 40% of unsecured loans to small and medium-sized firms with maturities of at least six months made between Mar. 1 and Dec. 31, 2020, the People's Bank of China said Monday.

PBOC Governor Puts Focus on Credit Support to Aid China Recovery

Commercial lenders should repay the central bank the funds a year after the transaction. The lenders will continue to receive interest payments from the borrower and will bear any losses if the loans go sour, the PBOC said. The central bank will sign contracts with qualified local commercial lenders via a special-purpose vehicle, and the plan could boost banks' unsecured loans to small firms by one trillion yuan, it said.

By taking loans to small businesses on to its balance sheet, the PBOC may help lower lenders' capital requirements and thereby lower the cost of further lending. While the authorities have cut policy rates multiple times this year, they've avoided the large-scale stimulus seen in other major economies to avoid aggravating the country's debt problem.

“The policy intention is to solve the funding problem for small and micro-sized companies, which play a vital role in job stability,” Qu Qing, chief economist at Jianghai Securities Co. in Beijing, wrote in a note. The policy would have “limited effects” on supplying liquidity to banks and lowering borrowing costs, meaning it can't replace outright interest rates cuts, he said.

The credit support plan will use funding from the PBOC's relending program which it has relied on to provide cheap base money to the financial system since the Covid-19 crisis. Unlike the regular re-lending funding which is offered at 2.5% a year, the PBOC said qualified commercial banks will only need to return the principal of the funding, indicating it's interest-free.

More details about the plan:

Qualified banks are local lenders rated between 1-5 level in the PBOC's recent quarterly financial institution rating
Companies receiving credit from the un-collateralized loans supporting program have to promise they'll keep jobs stable

The plan is an innovative version of an interest-free reverse repurchase operation, in which local banks still bear the credit risk, and that makes it different from quantitative easing, according to Zhang Lu, an analyst at CEBM Group Ltd. in Beijing. “The room for the central bank to further cut interest rates is limited as long as the economy doesn't worsen from here,” Zhang wrote in a note, adding the PBOC will instead focus on ensuring sufficient liquidity and direct the credit to needy sectors.

Bigger Potential

Some see the plan as having the potential to develop into a form of Chinese QE in the end.

“We think the program will have to be rolled over or scaled up amid the economic downturn,” said Xing Zhaopeng, a markets economist at Australia and New Zealand Banking Group Ltd. in Shanghai. “In fact, this will start the QE process of lending cheap funds directly to the real economy.”

The central bank also announced Monday that small companies would be allowed to delay loan repayments to March 2021. Combined, the two new policies would make monetary policy more “direct” in increasing loans to the real economy and help stabilize funding flows to small firms and improve their access to credit.

More details about the loan holiday policy and other requests made Monday:

The PBOC will sign interest rate swap contracts with commercial lenders via a special-purpose vehicle, and give relending funds as incentives to them for 1% of the loan principals being delayed. The total relending funds being offered is 40 billion yuan.
Companies enjoying the loan repayment holiday need to promise they'll keep jobs stable
Commercial banks are encouraged to improve their risk review system to make sure that un-collateralized loans to SMEs will increase as a proportion of all loans to those firms (defined as companies with a credit line of 10 million yuan or less)
Commercial banks were encouraged to shift their business focus to real economy borrowers including SMEs from the property sector and local government financing platforms
Commercial banks were also asked to change other underwriting standards to prioritize SME loans

What Bloomberg's Economists Say..
“We think the quota may expand further in the future, depending on how the economy is recovering from the impact of the coronavirus. The effectiveness of the policy move remains an important consideration -- banks may still face constraints in regulatory requirements (such as capital adequacy) and risk-aversion sentiment.”
David Qu, Bloomberg Economics
For the full note click here

With assistance from Bloomberg