MNI Analysis: PBOC Boosts Small Businesses Before Tariffs Hit

     BEIJING (MNI) - The People's Bank of China is looking to enhance financial

supports to small businesses as concerns of an economic slowdown and credit

shortage rise, particularly as the deadline of the U.S' trade sanctions is

approaching.

     The central bank announced on Monday it will cut relending interest rates

for small and micro companies (SMCs) by 0.5 percentage point as part of a

broader policy package to ease the financial strain on small firms. In addition,

the relending and rediscount quotas for small companies, as well as sectors

concerning rural areas, will be increased by a total of CNY150 billion yuan.

     This is another sign of "structural loosening" of monetary policy after the

PBOC said it would cut some banks' reserve requirement ratios by 50 basis points

on July 5, to support qualified debt-to-equity swap programs and help small

business financing, unlocking CNY700 billion of liquidity.

     The importance of SMCs has been highlighted with the appointment of Liu He,

the top planner for the Chinese economy, to the head of the Leading Group for

the Promotion of Small and Medium-sized Enterprises of the State Council on June

20. Central bank governor Yi Gang said at a forum in Shanghai that the SMCs

contribute to more than 60% of China's GDP, 80% of jobs and 50% of the country's

tax revenue.

     The support of SMCs has become a stimulus measure for policymakers to boost

the economy amid early signs of weakness.

     --LIQUIDITY BASIS

     The SMCs, mostly private firms, have witnessed increasing debt defaults and

funding strains as borrowing costs have risen and liquidity has tightened due to

China's clampdown on leverage in the financial system since 2016.

     The weighted average lending rate for non-financial firms, a key indicator

reflecting corporate funding costs, rose 22 bps in the first quarter to 5.96

percent, PBOC data showed, compared with a total of 47 bps in 2017.

     --ECONOMIC BUFFER

     Official economic data for May showed that growth in important areas like

exports, investment and consumer spending all declined compared with the same

month a year ago.

     The country needs to boost its domestic consumption to buffer the possible

impact to exports from a Sino-US trade war. SMCs will be key to achieving this

goal. 

     More stimulus measures are likely to be launched by the central bank in an

effort to strike a delicate balance between the need for tougher supervision and

reforms and ensuring the stability of the financial system, while keeping

economic growth on track.

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

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

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