Enterprise Financing Remains Expensive Despite Targeted Reserve Cuts by PBOC

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Chinese enterprises say that targeted reductions in the required reserve ratios of banks launched last month have done little to reduce the cost or difficulty for them to obtain financing.

The Chinese central bank launched a one percentage point reduction in the required reserve ratios for a range of lenders in April, the goal of which was to “guide financial institutions to expand the vigour of their support for micro-enterprises, increase stability of capital within the banking system and optimise the liquidity structure.”

The People’s Bank of China called for up to 400 billion yuan in funds unleashed by the reduction to be directed towards loans for small and micro-enterprises in order to reduce their financing costs, as well as called for banks to improve their financial services for this category of borrowers.

PBOC also said that the above requirements would be included in future macro-prudential assessments.

The move followed a previous reserve ratio reduction at the start of the year that also aimed to boost financial inclusion, as part of the broader theme touted by Chinese regulators of ensuring that the finance sector services the real economy.

Several weeks following the unveiling of the latest reserve ratio cut, however, Chinese enterprise says the move has done little to reduce the cost or ease of servicing their financial needs.

“We do not feel at all that there has been a reduction in the cost of funds,” said an executive from a large-scale photovoltaic company to 21st Century Business Herald.

“At present one of the main financing channels for our company is financial leasing, the cost of which has risen from 7% at the start of last year, to 10% in the middle of last year, to 11% at present.”

Other enterprises that make use of financial leasing said that the cost of funds obtained from banks or the asset-backed securities market has continually risen.

“Differences in the financing costs of enterprises of different types is very great, but they have continually risen since the middle of 2016,” said the manager of one financial leasing company.

An engineering equipment company based in Sichuan province said that the rates for the mortgage it used to obtain 4 million yuan in operating funds from a local joint-stock bank was around 6.8%, with total financing costs rising to above 9% once 2% in guarantee and procedural fees are included.

Rates for the same financing method at the end of last year were just 6.17% however.

Analysts point to two key reasons that the latest required reserve ratio cut has failed to improve the financing conditions for Chinese private enterprises.

They point out that the more than 400 billion yuan that PBOC wants to be used for lending to small and micro-enterprises is a barely modest amount compared to the huge demand for financing from China’s private companies.

PBOC data indicates that China saw new credit of 4.9 trillion yuan in the first quarter, for a year-on-year increase of 633.9 billion yuan.

While loans to small and micro-enterprises increased 747.3 billion yuan, this was nonetheless a reduction of 332.6 billion yuan compared to the same period last year.

This means that the 400 billion yuan that PBOC wants directed towards small businesses would only bring lending to levels seen last year, let alone keep pace with rising demand for funds from private enterprise.

Secondly, while the costs for banks to obtain funds via reductions in the required reserve ratio is lower than the cost of funds obtained via the medium-term lending facilities (MLF) that PBOC uses for its open market operations, the growth in bank deposits has continually declined following the emergence of various money market funds and internet financing companies in China.

The latest data from PBOC indicates that the RMB deposit balance stood at 169.18 trillion as of the end of March, for YoY growth of 8.7%, or a deceleration of 1.6 percentage points compared to the same period last year.

As a result Chinese banks have continually raised their rates for large-denomination certificates of deposit, or used various methods such as deposit “gifts” to covertly raise rates in order to retain customers.

“Previously it was very difficult for us to obtain funds from the central bank via MLF,” said one loan manager at a municipal bank in Sichuan province.

“While re-sales from large-scale banks and reserve ratio cuts are certainly of benefit to reducing our cost of funds, this is only one part of our debt. Much more of our low-cost debt is retail deposits, which are now disappearing.

“Compared to the big state-owned banks, the customer base of municipal banks is quite narrow, and we’ve used a range of tricks to expand deposits, including providing gifts, relying on relationships and raising rates.

“However, it’s still been very difficult to change the fact that deposit growth is sliding…if our debts side isn’t large, then costs can’t be reduced, and it’s very difficult to cut costs for enterprises.”

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