MNI EXCLUSIVE: China Spurs Bank Recapitalisation To Boost SMEs

--PBOC To Move To Boost Smaller Lenders' Capital

--Smaller Banks Key To SME Credit Flows

     BEIJING(MNI) - China will move to recapitalise private and small banks to

free up credit for small businesses hit by coronavirus disruption and sagging

global demand, a PBOC official told MNI, with another senior central bank

manager and a policy advisor noting that exporters will be a particular focus

for assistance.

     Local governments could use funds raised by issuing debt to recapitalize

small- and medium-sized regional lenders as their asset quality comes under

strain, said Guo Xinming, head of the PBOC's Nanjing branch. In addition,

China's 20 private banks should be allowed to fortify core equity Tier 1 capital

via share offerings, he said, adding that regulators should make preferential

tax and fee cuts and relax some restrictions limiting private lenders'

expansion. Current rules restrict private development of asset management

businesses and branch openings, among other activities.

     Boosting bank lending is vital for the People's Bank of China, which has

been told to provide much of the stimulus after pandemic shutdowns earlier this

year, with Premier Li Keqiang's working report in May calling on it to "develop

new monetary policy instruments" to help the real economy. Key to its task will

be increasing the flow of credit to the small- and medium-sized enterprises

which provide 60% of China's gross domestic product and 80% of urban jobs.

     Private and small regional banks provide the bulk of loans to SMEs, but

officials fear their core Tier 1 capital levels are too low to cope with the

rising risk of nonperforming loans. City commercial banks' overall capital

adequacy ratio of 12.65% of risk-weighted assets and rural commercial banks'

12.81% ratio are higher than regulatory minima but still insufficient, according

to Guo.

     --SPECIAL PURPOSE VEHICLES

     Smaller banks should be allowed to reduce dividends, and regulators could

create targeted recapitalisation tools, Guo said. Local governments could also

pump funds into lenders, via transferring equity in state-owned companies or

selling land. Issuance of central government special Treasury bonds and local

government special-purpose bonds could be used to set up special purpose

vehicles to provide capital, he said, adding that these SPVs could even be

topped up using bank reserves held at the PBOC.

     While the central bank works to strengthen banks providing credit to SMEs,

it will also take action to help smaller companies directly. Wang Yuling, head

of the PBOC's branch in Wuhan, Hubei province, scene of China's first and most

intense Covid-19 outbreak, said authorities will ensure banks shift outstanding

loans to the new Loan Prime Rate, which tracks official monetary policy more

closely than the previous benchmark, among other credit moves.

     SMEs will also be allowed to delay principal and loan payments and to roll

over maturing loans, Wang wrote in a written response to MNI's questions.

     Additionally, the central bank will provide support to banks issuing bonds

to provide SME finance and coordinate with underwriters and guarantee

institutions to facilitate debt issuance by smaller companies themselves, she

said.

     Companies selling for export will be a particular focus for assistance, Lv

Wei, a member of the 13th National People's Congress's Financial and Economic

Affairs Commission, told MNI. Not only will they benefit from broader policies

such as cuts in taxes and fees, but will also receive help to diversify export

destinations, develop cross-border e-commerce, or to redirect sales to the

domestic market. The government also wants to boost its provision of export

credit insurance, she added.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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