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--Banks Worried About Credit Quality
--Concerns Over Mixed Policy Signals
     BEIJING (MNI) - The People's Bank of China is redoubling efforts to
persuade banks to boost lending to private sector businesses, despite complaints
from financiers and some officials of contradictory policy signals at a time
when authorities are also promoting deleveraging of state-owned enterprises, MNI
understands.
     In a sign of the importance with which the PBOC regards increasing credit
to the real economy as trade tensions risk crimping growth, the central bank has
made it the focus of two recent two meetings, chaired by Governor Yi Gang and
attended by heads of the four state-owned lenders, prominent businessmen and
policy advisors including former Governor Zhou Xiaochuan.
     "Disclosing the high-profile participants indicated that the issues
discussed were highly regarded by the top policymakers," said an advisor close
to the PBOC, referring to the meetings on Aug. 31 and Sept. 4, in which the
central bank pressed banks to lend more to small- and medium-sized enterprises
(SMEs) in particular.
     --COORDINATED ACTION
     Governor Yi said the PBOC will work with the Ministry of Finance on
measures including targeted RRR cuts and expansion of medium-term lending
facility collaterals.
     Vice Premier Liu He, President Xi Jinping's deputy in charge of the
economy, has also said China needs to resolve outstanding funding issues faced
by SMEs.
     But state-controlled banks have been hesitant to comply with the PBOC's
request at a time when the government is also waging a deleveraging campaign,
aimed mainly at state-owned enterprises and local governments, to wean the
economy off an addiction to credit. Their reluctance has been heightened by the
deepening trade war with the U.S., which is clouding the outlook for the economy
and for the creditworthiness of many small- and medium-sized exporters and
manufacturers.
     --FUNDING COSTS
     Since April, the PBOC has conducted one targeted RRR cut for SMEs and
expanded the acceptable collateral for its medium-term lending facility to
lower-ranking corporate bonds, but to limited effect.
     Notes from the meetings showed business owners complained of continuing
high costs of funding, asked for more reserve requirement ratio cuts and pleaded
with the PBOC to treat SMEs and state-owned enterprises equally.
     A bank manager in Shanghai told MNI lenders are cautious about extending
further credit to SMEs under current economic conditions, despite the PBOC's
ensuring ample liquidity in the interbank market.
     Other prominent commentators, including PBOC researcher Xu Zhong, have said
overtly pressuring banks into action is interfering with the market and sends
conflicting signals.
     --MESSY POLICY SIGNALS
     With the deteriorating trade dispute, rising corporate defaults unnerving
the bond market and a depreciating yuan, the PBOC also needs to manage
sentiment, which is becoming more pessimistic.
     "The key to stabilizing market sentiment is policy continuity. Messy policy
signals, such as stressing deleveraging then and increasing liquidity injection
could easily confuse the market and damage the government's credibility," a
government advisor told MNI.
--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com
--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com
[TOPICS: MAQDS$,M$A$$$,M$Q$$$,MT$$$$,MX$$$$,MGQ$$$]