By Yawen Chen and Se Young Lee
BEIJING (Reuters) – China’s banking and insurance watchdog said on Tuesday that it will soon release new rules to boost financing to the private sector including small companies, and urged banks to keep lending to businesses facing temporary difficulties.
Chinese leaders have called for more measures to support the private sector and protect jobs as the world’s second-largest economy slows. The sector, comprising a legion of small firms, accounts for 80 percent of urban jobs.
Policymakers from the central bank to financial regulators have rolled out a slew of measures this year to spur lending, including four rounds of reductions in the cash that banks need to set aside as reserves. Taxes are also being cut.
Ensuring a steady flow of affordable financing to the private sector has been a perennial problem for China’s policymakers. Commercial banks have preferred to lend to state-owned enterprises rather than private companies, which are viewed as being less creditworthy.
Bond defaults are also on track to hit a record this year, discouraging banks from extending credit.
China’s economic growth cooled to its weakest quarterly pace since the global financial crisis in the third quarter as the trade war with the United States added to pressure on the already-slowing economy.
A regulatory clampdown on shadow banking has further restricted smaller companies’ access to funding.
China will encourage financial institutions to take full advantage of the latest monetary, fiscal and tax policy steps to increase lending to smaller firms, the China Banking and Insurance Regulatory Commission (CBIRC) said in a news release ahead of a media briefing on Tuesday.
The CBIRC would support banks to issue special bonds for lending to small firms and apply favorable risk weighting to evaluate bank loans to smaller firms, it said.
The average interest rate for loans made by 18 major commercial banks to smaller firms stood at 6.23 percent in the third quarter, 0.7 percentage point lower than the first quarter.
“Targeted measures should be taken to address the painful financing problems facing private enterprises, including minimizing banks’ over-reliance on collateral and guarantees when lending to private and small and micro-sized firms,” CBIRC Vice Chairman Wang Zhaoxing told reporters.
Outstanding loans to private companies stood at 30.4 trillion yuan ($4.36 trillion) at end-September, Wang said.
Industrial and Commercial Bank of China Ltd (ICBC), the country’s biggest commercial lender, said its loans to private firms stood at around 2 trillion yuan as of end-September, up more than 100 billion yuan from the start of 2018.
ICBC Chairman Yi Huiman said the bank would form a consortium with the central bank and the China Bond Insurance Co. to support private enterprises’ bond financing.
“Ensuring the continuance of bond financing is vital to address private firms’ liquidity problems,” he told reporters at the news conference.
“We will explore how to make full use of this support tool to support the bond issuance of private enterprises, to stabilize this market. If it could be stabilized, the liquidity issue of most large and medium-sized private enterprises will be resolved,” he said.
CBIRC’s Wang said banks should lend a helping hand to private firms with good fundamentals that are only faced with temporary funding woes, and take a targeted and market-based approach in lending to distressed firms hit by stock pledge and guarantee risks.
“Some medium and large-scale private enterprises have encountered some liquidity difficulties. But if the liquidity difficulties of these enterprises are only temporary, as their development prospects are promising with competitive products, technology, and future orders and cash returns, we require banks not to stop lending to them,” CBIRC’s Wang said.
Interest rates on its loans to the private sector averaged 5.2 percent as of the end of September, ICBC said in a separate handout at the briefing.
The central bank’s policy lending rate is 4.35 percent.
Wang also warned about financial risks triggered by some private firms who have broken away from their core businesses and made highly-leveraged acquisitions at home and abroad through rapid debt expansion. He said banks should be selective to avoid funding zombie and dysfunctional firms.
“Private enterprises must work hard to improve their core competitiveness and financial capabilities, and must not blindly expand their liabilities,” he said.