The China Banking and Insurance Regulatory Commission (CBIRC) has called for the country’s banks to step up lending towards the real economy, while heavily stressing the need to improve financial inclusion.
On 18 August CBIRC issued the “Notice on Further Effectively Performing Lending Work and Raising the Efficiency and Quality of Service for the Real Economy” (关于进一步做好信贷工作提升服务实体经济质效的通知) (Directive 76).
The Notice calls for the expansion of lending by banks to the real economy, with the state-owned Securities Times referring to this as the “priority of priorities” for regulators.
The latest notice marks the third time in just a month that the CBIRC has called for Chinese banks to expand credit extension, as unresolved trade tensions with the United States cast a pall over the economy.
“[The shift] from frequent reference to deleveraging and combating market irregularities over the past year to the current constant emphasis on expanding credit extension can be said to be a major change in macro-policy targets,” said Securities Daily.
“The theme of policy has shifted from tightness to loosening, and from ‘stable money + tight credit’ to ‘loose money + loose credit.”
Financial inclusion is the core area of emphasis for the latest directive, which calls for”reductions in financing costs, and full use of current ample liquidity on the market” to expand funding support for small and micro-enterprises and micro-enterprises, while upholding the principle of “maintaining principal with minimal profit” (保本微利).
The Notice calls for reductions in loan cycle costs and contractions in “funding gaps” for those small and micro-enterprises that continue to have financing needs once their existing loans mature.
CBIRC also wants expanded credit support for “leading private enterprises with outstanding main businesses, excellent corporate governance, comparatively low debt ratios and strong risk-controls,”
Sources said to Securities Daily that regulators currently “place extreme importance on banks expanding loan provision to small and micro-enterprises.”
CBIRC has requested that banks of all sizes reduce interest rates for small and micro-enterprises and individual businesses to a bare minimum, with some large-scale banks already cutting rates for these clients to around 4.77%.
CBIRC has also started to encourage banks to provide “loan continuation without principal repayment” services to small and micro-enterprises.
Domestic analysts have expressed doubt over whether CBIRC’s push for banks to give greater support to the real economy will prove effective.
Dong Ximiao (董希淼), senior researcher at Renmin University’s Chongyang Institute for Financial Studies, said that demanding banks reduce rates for small and micro-enteprrises and restrict fees is not in accordance with the laws of the market.
According to Dong placing excessive controls on rates and fees will only further reduce the willingness of banks to extend credit to China’s small and micro-enterprises.
“Resolving the problems of financing being difficult for small and micro-enterprises means first resolving financing difficulties, or even allowing banks to appropriately raise rates and increase fees to cover small and micro-enterprises within a certain timeframe.”
One source from Beijing’s finance sector points out that “at present more funds are flowing towards other financial institutions and central state-owned enterprises.”
“In actuality central SOE’s are not the enterprises with the greatest lack of funds…some central financial companies are capable of obtaining overnight funds from the market of under 2%, before transferring those funds to banks to make interbank deposits, where rates are over 2% or even around 3%, in order to profit from the spread.”