MNI SOURCES: PBOC Official Says China Should Allow New Banks

--Current Banks Not Lending Enough To Smaller Business, PBOC Official Says

--Monetary Easing Will Make Little Difference For Private Companies' Financing

--New Banks Could Lend More To Private Business

     BEIJING (MNI) - Allowing the creation of more Chinese banks would be a more

efficient way of helping private and smaller companies in the event of any

further economic slowdown or trade troubles than additional monetary easing, a

People's Bank of China official told MNI.

     Existing banks prefer to lend to government entities and state-owned

enterprises, said the official, who asked not to be identified, calling for the

government to grant licences to new institutions to prompt more competition in

the sector.

     "It's very simple, the government should expand market access, give more

licenses," the official said.

     So far the banking regulator, wary of financial risks, has been cautious

about allowing entries to the sector, but there is significant private sector

interest in establishing new lenders, which could be tailored to the needs of

private and smaller firms, the official said.

     "The supply and high cost of financing would not be problems once the

banking sector is properly restructured," the official said, adding that it

would be key to develop medium- and small-sized lenders.

     Even targeted attempts to prompt existing banks to lend more, such as by

cutting their reserve requirement ratio if they reach specified levels in areas

such as agricultural development, have failed to gain much traction, the

official said, citing observations made by local branches of the central bank.

     "(The key) is not to further loosen monetary policy. Even if you ease

further, the lenders won't put the money in the areas which need the money," the

official said.

     Referring to the experience of a city in Southern China, the official said:

"The banks are not interested, none of them hit the target."

     "They don't care, as their performance is evaluated based on their lending

to other private customers."

     Recent PBOC measures, such as when in January it lifted the ceiling on

small business loans which can contribute to cuts in banks' reserve requirement

ratios to CNY10 million from CNY5 million, have caused market distortions, said

the official.

     Some big banks, chasing the lower RRRs, have slashed their lending rates to

levels with which smaller institutions cannot compete, the official explained.

     The Industrial and Commercial Bank of China since December has lent to

small and micro-sized businesses at 3.8%, below the official benchmark,

according to Securities Times.

     "Lending at the benchmark rate is lower than costs, it is more politically

driven in these cases," the official said. "The problem is are you going to be

able to price loans below cost indefinitely while ensuring supply? It's

unsustainable."

     Government moves to support the economy with infrastructure investment

could add to the financing difficulties of the private and smaller companies

which are suffering the most from the slowdown and trade tensions, the official

noted. Property investment could also divert resources from productive private

enterprise, the official said, noting: "The pie is limited."

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

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

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

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