PBoC: Further support to SMEs remains on the cards – UOB

FXStreet reports that UOB Group’s Economist Ho Woei Chen, CFA, assesses the recent measures by the PBoC aimed at supporting the SMEs.

“The People’s Bank of China (PBoC) said on Monday (1 June) that it will begin to purchase uncollateralized loans to small & medium enterprises (SMEs) with maturities of at least six months, for loans made between March to December 2020. PBoC will purchase 40% of qualified loans using RMB400 billion special re-lending funds provided through a special purpose vehicle (SPV) and requires the banks to buy back the loans after one year.”

“Qualified financial institutions include city commercial banks, rural commercial banks, rural cooperatives and private banks. The new measure is expected to reduce banks’ capital requirements and allow them to lend more to SMEs as well as reduce funding costs as PBoC will not charge an interest for the loans.”

“Unlike the previous three rounds of re-lending facility totaling RMB1.8 trillion, this direct loan purchase will be interest rate-free compared to the interest rate of 2.5% for earlier relending. The PBoC also pointed out that the new measure will be more directed and ensure precise use of its monetary tools.”

“The new measures follow the announcement at the National People’s Congress (NPC) that SMEs can delay their interest and principal payments to the end of March 2021, from an original deadline on 30 June. The government also asked the big commercial banks to increase loans to SMEs by more than 40% this year, up from 30% in 2019. The PBoC repeated the call for banks to focus on directing credit to the real economy and SMEs.”

“The latest announcement signals PBoC’s intention to use more innovative monetary policy tools instead of relying on conventional interest rate and banks’ reserve requirement ratio (RRR) cuts to boost the economy as the interest rate and RRR are already at low levels.”

“Looking ahead, the easing inflation continues to provide some room for further cuts to the LPR though this is likely to be even more moderate as focus turns to direct and more targeted funding support. We have factored in another 30 bps cut to the 1Y LPR to 3.55% by end-4Q20. We also see room for another one to two rounds of RRR cut in the next 3-6 months to reduce funding costs and increase the room for banks to expand credit and absorb the RMB1 trillion of special treasury bonds issuance. However, we note that the space for RRR cuts for the smaller financial institutions has narrowed after earlier moves.”