China’s government is reaching beyond its monetary policy tool box to free up capital and direct funds towards the nation’s cash-starved businesses to help the economy claw its way out of its worst slump in four decades.
The government has called on banks to sacrifice as much as 1.5 trillion yuan (US$212 billion) in profits this year to finance cheap loans, cut fees, defer loan repayments and grant more unsecured loans to help small businesses survive the downturn caused by the coronavirus lockdown.
Separately, the State Council, China’s cabinet, signalled late on Wednesday that it would cut the amount of reserves banks are required to hold at the central bank, freeing up more money to spur lending.
“We are guiding the market to lower lending rates through interest-rate reform,” Yi Gang, the governor of the People’s Bank of China (PBOC), told the Lujiazui Forum on Thursday, confirming the move was a de facto cut in interest rates. “Financial institutions are urged to sacrifice profits to benefit corporate borrowers, helping reduce their borrowing costs.”
Yi added that the PBOC would achieve the goal by directing financial institutions to offer lower lending rates, adding fresh funds at low rates that can be accessed by borrowers directly, and slashing service fees.
The profits to be sacrificed would be equivalent to roughly 75 per cent of the entire net profit of the commercial banking industry in 2019, based on the data from China Banking and Insurance Regulatory Commission (CBIRC).
China’s US$41 trillion banking system