State Council Reiterates Opposition to “Flood-style Irrigation” of Chinese Economy

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The State Council has reiterated its commitment to ensuring that China’s financial sector better services real economy, as well as the avoidance of any “flood-style” irrigation of the monetary system.

Premier Li Keqiang convened an executive meeting of the State Council on 22 August which highlighted the launch of “policies to further ease the problem of finance being difficult and expensive for small and micro-enterprises, in order to drive the financial sector to better service the real economy and  expedite stable employment and enterprise success.”

The meeting stressed several key policy themes in the near term including:

i) Maintenance of stable monetary policy and avoidance of “flood-style irrigation.”

The State Council said it would focus on targeted policy implementation, endeavour to clear out policy transmission mechanisms, encourage financial institutions to increase lending to small and micro-enterprises, and reduce financing costs.

It will also “rationally confirm small and micro-enterprise loan periods and repayment methods, contract loan assessment and approval periods, and appropriately raise the share of medium and long-term loans,” as well as steadily develop yield bonds and private placement bonds by small and medium-enterprises.

ii) Establish incentive mechanisms linking financial institution performance assessments with small and micro-loans.

The State Council said that it would accelerate the implementation of policies to make interest revenues from loans to  micro and small-enterprises exempt from value-added taxes, and support the issuance of small and micro-enterprise asset-backed securities.

iii) Firmly place equal emphasis on driving growth and risk prevention

The State Council will optimise monitoring and assessment, establish new specialist assessment indices for small and micro-loans, ensure and that small and micro-enterprises obtain genuine benefit, and strictly ban conduct such as savings and loan links and loan tie-in sales, in order to effectively prevent and resolve credit risk.

The State Council meeting arrives just after public remarks from central bank vice-governor Zhu Hexin (朱鹤新) on the need to “invest all efforts in the proper performance of work for the finance sector to service the real economy, and properly control the sluice gate of the money supply.”

Zhu said that PBOC would absolutely refrain from engaging in “large-scale irrigation,” and instead use “mechanism innovations to raise the ability and willingness of the financial sector to service the real economy.”

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