MNI ANALYSIS: China Coaxes Banks Into Lending Via Bonus Credit

     BEIJING (MNI) - China's central bank and top financial regulator, concerned

with stalling growth, are coaxing risk-averse banks into lending via both

administrative orders and financial incentives. 

     This week, the China Banking and Insurance Regulatory Commission (CBIRC)

highlighted a visit by the head of the watchdog, Guo Shuqing, to Bank of China,

the second-largest lender.

     Guo, also the Communist Party secretary of the People's Bank of China

(PBOC), met executives of other largest banks and regional lenders. The chairman

extolled the role of small businesses in the economy and urged the lenders to

boost lending to the cash-starved private sector. 

     "We must be clear-eyed and see glaring issues of difficulties and

costliness of raising capital," according to a statement on the CBIRC website.

Large and medium-sized banks must play the role of the "head goose" in

increasing the intensity of credit delivery and help drive down the real

borrowing rates of small and micro-sized businesses, the regulator said.

     --WINDOW GUIDANCE

     In a one-two punch, the PBOC, through its so-called window guidance, is

reported by the Chinese press to be incentivizing banks to lend to riskier

ventures by giving them extra cash through the Medium-term Lending Facility

(MLF). 

     For any increases in lending to borrowers with AA rating or higher, the

central bank will give the equivalent in MLF to the lenders, with media

reporting other terms for borrowers with lower ratings. 

     The directive applies only to loans for business operation purposes, the

reports say. PBOC's media office declined to comment when telephoned by MNI.

     The extraordinary steps follow months of so-called targeted liquidity

injection and comes at a time when other major economies are phasing out easy

credit policies.

     In addition, as MNI noted in an exclusive report, the PBOC is increasing

liquidity injections to selected banks. However, sources told MNI the impact of

these credit boosts has so far been minimal, as major refinancing channels are

restricted and lenders' risk appetite is depressed.

     --DELEVERAGING WAR

     Regulators have for a second year continued to wage a campaign to push

deleveraging and attempt to diffuse time bombs in the economy, such as real

estate bubbles, shadow banking and local government financing vehicles, to name

just a few. They have done that through tightened credit and strict enforcement

of Macro Prudential Assessment, which force banks to clean up their shadow

banking transaction and account for all hidden risks.

     While this drive may have made the banking sector look cleaner on paper, it

has also made banks extremely credit averse, with lenders sitting on their cash

than loaning to the private sector.

     Meanwhile, the Chinese economy is in danger of stalling as the private

sector slows. The outlook for exports, a sector many private businesses depend

on, is clouded by the prospect of a protracted trade dispute with the U.S. And

once-red hot investment growth is losing steam as debt-laden businesses find it

hard to get funding. 

     So what will the latest measures lead to? It is hard to say now if the

flood of cash will be enough to convince lenders to hoover up low-rated

corporate bonds, nor can the regulator guarantee the extra liquidity won't flow

to unintended areas.   

     --LIKELY OUTCOMES

     However, two likely outcomes may be seen from now. The total social finance

and M2 growth, which both recorded historical lows in June, may rebound if banks

follow the instruction, as both funding through the bond market and money supply

via higher MLFs increase.

     On top of that, the liquidity stimulus can further weigh on the yuan

exchange rate unless the central bank steps in. The USDCNY closed Thursday at

6.7734, the weakest in over a year, while at the same time, USDCNH broke through

the 6.8 level. Early Friday, USDCNH hit a high of 6.8367, while onshore touched

6.8117.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

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