State Council Highlights 300B Yuan Reloan Quota Increase, Accelerated Bond Issuance in Financial Inclusion Push


China’s State Council has unveiled a range of measures to bolster financial inclusion and support for small businesses in the wake of the COVID-19 pandemic.

A meeting of the State Council convened on 1 September called for “expanding the vigour of assistance for market entities – and micro, small and medium-sized enterprises in particular; strengthening policy reserves, and effectively performing cross-cyclical adjustments.”

“[We] must further expand the vigour of support for micro, small and medium-sized enterprises, and target problems such as stubbornly high commodities prices leading to increases in production costs, increases in accounts receivables and the impacts of the pandemic.”

The State Council highlighted four key areas of policy, including:

  1. A 300 billion yuan increase in the reloan quota to support small businesses,
  2. Pushing commercial banks to make more financial inclusion loans to micro-and-small businesses,
  3. “Moderate” acceleration in the issuance of special bonds, and
  4. Strengthening policy reserves and effectively performing cross-cyclical adjustments.

The 300 billion yuan reloan quota increase

The State Council said a 300 billion yuan increase in the reloan quota to support small businesses this year would serve to support local legal person banks in making loans to micro-and-small enterprises and individual industrial and commercial registrants, as well as improvements to policies to provide relief to enterprises in sectors hard hit by COVID-19.

“Small Business Support Reloans” (支小再贷款) are a special category of reloan that were first established in March 2014 for small-scale municipal and rural banks, to drive reductions in rates for the loans they make to micro-and-small enterprises.

At present the Small Business Support Reloan interest rates are 1.95% for three months, 2.15% for six months, and 2.25% for one year.

In 2020 the Chinese central bank initially launched 300 billion yuan in special loans and 500 billion yuan in reloan rediscount quotas, followed by a further 1 trillion yuan in reloan rediscount quotas, for a total of 1.8 trillion yuan.

The reloan balance has declined in 2021 following the maturation of credit issued last year, and stood at 888.2 billion yuan at the end of June.

The State Council said that the 300 billion yuan quota increase was equal to more than one third of the balance at the end of June, and would help banks to expand the vigour of support for micro-and-small enterprises, and make more low-interest rate loans.

Driving banks to make more financial inclusion loans to micro-and-small enterprises.

The State Council has proposed multiple targeted measures to drive an increase in financial inclusion lending by banks to micro-and-small enterprises that lack the collateral for loans.

Related measures include”

  1. Supporting risk compensation mechanisms for the National Financial Guarantee Fund (国家融资担保基金), and driving the provision of guarantees for micro-and-small enterprises that lack collateral or credit records;
  2. Guiding financial institutions to undertake bills discounting and bills financing with the support of the Chinese central bank, to support material purchases by small businesses amidst rising commodity prices.

Accelerating pace of special bond issuance

The State Council highlighted the role of the issuance of special bonds by local governments in driving broader investment in the Chinese economy.

Domestic analysts had previously forecast an acceleration in the issuance of special bonds in the second half due to easing economic conditions, leading to a stabilisation or even a rebound in the pace of infrastructure investment.

Official data indicates that infrastructure investment for the period from January – July saw a YoY rise of 4.6%, for a deceleration of 3.2 percentage points compared to the first half.

Strengthening of policy reserves, effectively performing cross-cyclical adjustments

The State Council meeting called for “overall effective performance of cross-cyclical adjustments” and “strengthening policy reserves, and researching and unveiling when appropriate continuation policies when certain policies to benefit enterprises expire, in accordance with changes in the international environment and the development needs of the real economy.”

The State Council said that this would “increase the ability to deal with difficulties and challenges, and maintain stable, healthy economic development and employment stability.”