China Releasing More Than $100 Billion to Boost Lending
China’s central bank is freeing up more than $100 billion for commercial banks to boost lending and restructure debt, as the Chinese leadership tries to shore up growth amid slowing momentum for economic expansion and an intensifying trade brawl with the U.S.
In a statement Sunday, the People’s Bank of China announced that it is reducing the amount of reserves banks are required to keep with the central bank by half a percentage point starting July 5. That is the day before a U.S. deadline to slap punitive tariffs on tens of billions of dollars in Chinese goods.
Under the reserve cut, some 500 billion yuan ($76.86 billion) will be released for 17 large banks, including the Big Five state-owned banks, the central bank said. It said the banks are to use the freed-up funds by converting bad loans into equity in companies that default on their debts.
Another 200 billion yuan is being unleashed for the country’s city-level commercial banks and other smaller lenders, and those funds are to be used to expand lending to small businesses, the central bank said in the statement.
The move was well-flagged, following a notice last week from the governing State Council urging more measures to help small firms. Still, it marks a shift in government policy toward easier access to funds for lenders and away from the tightfisted credit controls imposed in recent years to keep in check already high debt levels that could choke growth long term.
That change, government advisers and economists said, reflects Chinese leaders’ desire to shore up growth, stabilize financial markets and alleviate concerns that the trade fight with Washington will batter an economy that is losing steam.
After shares on Chinese exchanges followed global markets downward Tuesday on fears of an outright trade conflict, Liu He, President Xi Jinping’s economic captain, dispatched central-bank Governor Yi Gang to talk to state media to try to calm jittery investors, according to people with knowledge of the matter. In an interview, Mr. Yi pledged to use monetary policy “comprehensively” to fend off any “external shocks.”
Following the reduction in banks’ reserve-requirement ratio, analysts expect more loosening, including increasing lending quotas for banks, relaxing mortgage restrictions for home buyers in some cities and easing limits on local governments to borrow.
“China is on the way toward monetary easing,” said Zhu Chaoping, a Shanghai-based global market strategist at J.P. Morgan Asset Management.
The shift, however, is tricky, potentially aggravating still-voluminous levels of corporate and government debt and reflating asset bubbles that Beijing has fought hard to control in the past two years. In some previous reserve reductions, banks have had to meet central-bank criteria for lending to small businesses to lower their reserves. For the latest move, the central bank didn’t impose such a condition.
The latest reduction also tries to jump-start a two-year-old loan-relief plan that is supposed to help big corporate borrowers cut their debt but that the banks dislike. Under the debt-for-equity plan, companies give equity to their lenders in return for debt forgiveness. But in accepting equities of questionable value, banks were required to bump up the capital they set aside against these riskier holdings, constraining their liquidity.
By releasing more long-term funds for the big banks, the central bank said it wants to encourage these lenders to step up their debt-for-equity restructurings. The central bank also warned the big lenders against using the funds to make more loans to struggling corporate borrowers.
Targeted easing measures hasn’t worked well in the recent past. In 2015, for instance, reserve requirements were cut for select banks four times to channel more financing for small businesses. Funds continued to flow to state-owned firms, causing their debt loads to keep climbing well into 2016, while private companies pared their leverage during that time, according to research firm Gavekal Dragonomics.
Meanwhile, the selective loosening also contributed to frenzied home buying in many big Chinese cities, prompting the government to reinstate tight mortgage and other restrictions to curb speculation. “The tendency will be for the liquidity to leak to other parts of the system, most likely property, where the moral hazard problem remains as great as ever, ” said Gene Frieda, London-based global strategist at Pacific Investment Management Co.
Property investment, more government spending on infrastructure and a surprising boost from exports to a rebounding U.S. and Europe kept the Chinese economy humming most of the past two years. That allowed President Xi to focus on curbing the growth of debt and other financial risks that economists have cited as a long-term vulnerability for the world’s No. 2 economy.
Growth is showing signs of waning–from investment in fixed assets to household consumption–and corporate defaults are rising, especially by private companies squeezed by the debt controls.
So far, the trade fight, initiated by the U.S. to reduce a trade imbalance $375 billion in Beijing’s favor last year and to get China to end policies Washington says favor Chinese companies, has been mostly words. In April, the central bank cut the reserve requirement pre-emptively to allay worries that the trade battle would hit the economy.
Should the U.S. imposes tariffs on $34 billion of Chinese goods early next month as the White House has planned, that would shave 0.1 percentage point off China’s growth in the first year, according to economists. The damage could rise to 0.3 percentage point if the tariffs increase to $200 billion of Chinese products, as President Donald Trump has threatened. Those estimates don’t factor in retaliation from China, which has vowed to match the U.S. dollar for dollar.
With so many factors weighing on growth, Beijing is going to have to loosen its tightfisted control on credit. “You have multiple objectives at any point in time,” said MK Tang, a China economist at Goldman Sachs. “You have a couple of balls in the air and when one ball drops a bit lower, you have to refocus.”
Source: Dow Jones