MNI INSIGHT: PBOC Steps Ups Pressure On Banks To Lend

--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

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