By Chan Kung and Wei Hongxu*
Recently, the Chinese State Council executive meeting once again proposed the financial support plan for the real economy, especially for small and medium-sized enterprises (SMEs), hoping that SMEs can make full use of the current low-interest rate policy environment and the future downward interest rate environment to raise funds and ease the liquidity pressure. The State Council executive meeting also proposed to “further implement targeted RRR cuts for small and medium-sized banks”. This is the second time this month to release a directional cut signal. From the perspective of monetary policy, as ANBOUND has previously noted, the policy department is increasing financial support to the economy in a gradual easing manner.
The policies proposed by the State Council include: increasing the re-discount quota for small and medium-sized banks by RMB 1 trillion; supporting financial institutions in issuing RMB 300 billion of small and micro-financial bonds, all of which will be used to issue small and micro loans; guiding the net financing of corporate credit-backed bonds to increase by RMB 1 trillion over the previous year; expanding low-cost financing channels for private and SMEs; as well as encouraging the development supply-chain financial products such as raising funds pledged against orders, warehouse receipts and accounts receivable. With this, smaller firms may thus gain access to another RMB 800 billion in annual financing backed by accounts receivable. At the same time, China will further implement targeted required reserve ratios, RRR cuts for small and medium-sized banks, encourage banks to funnel all the newly obtained funding in the form of loans at concessional rates to micro, small and medium-sized enterprises. The RRR cut mainly targets small and medium-sized banks such as urban commercial banks and rural commercial banks, and the release of funds is expected to be around RMB 500 billion. It is estimated that the credit support for SME financing will exceed RMB 4 trillion.
If we consider the overall financing situation of SMEs, the financing of micro, small and medium-sized enterprises does not account for a high proportion in the overall economy. Data from the China Banking and Insurance Regulatory Commission (CBIRC) showed that the loan balance of inclusive small and micro businesses at the end of 2019 was RMB 11.7 trillion, up 25% year-on-year. By the end of 2019, China’s banking financial institutions had total assets of RMB 282.5 trillion. Financing for SMEs accounts for only about 4.14% of the total, which, at the current scale of RMB 4 trillion credit support, would exceed the set target of 30% growth. But overall, it is not enough to support the goal of economic growth. Therefore, in the future, monetary policy will still gradually expand the scope of support to enterprises and increase the intensity of easing.
On the other hand, monetary support for government investment is also increasing. The State Council executive meeting pointed out that it is necessary to further increase the scale of local government special bonds issuance and expand effective investment to shore up weak spots. On the basis of the special bonds quota that has been issued for this year, the local government special bonds of a certain amount should be issued in advance according to the procedures, and give priority to areas with many key projects, low-risk levels, and accelerate the construction of major projects and major livelihood projects. Local governments should promptly issue special bonds issued in advance and strive to complete the issuance in the second quarter. Considering the amount of special bonds already issued in advance, the amount of special bonds issued by local governments may increase by RMB 700 billion to RMB 1 trillion in the second quarter, and the annual quota of new special bonds is expected to reach around RMB 4 trillion.
Since the outbreak of Covid-19, the People’s Bank of China has injected about RMB 1.35 trillion of liquidity into the market through tools such as re-lending, re-discounting and reducing reserve requirements. The financial release of nearly RMB 5 trillion can be regarded as the gradual easing of monetary policy. Of course, China’s monetary policy remains structurally loose, with a focus on “targeted easing” of investment in SMEs and local infrastructure projects. On the one hand, the government invests mainly in infrastructure construction to lay a solid foundation and maintain the basic stability of the economy. On the other hand, it is to strengthen support for SMEs that are greatly affected by the epidemic. From the perspective of the long-term trend since last year, China has adopted the accommodative monetary policy to support SMEs, it does not expect to see short-term effects, but hopes to enhance the vitality of the economy through continuous support, cultivate long-term drivers of economic growth, and realize the change of economic structure.
Because of this, monetary policy is still trying to avoid stimulating the economy by cutting interest rates across the board. It uses the policy interest rate to guide the Loan Prime Rate (LPR) to gradually reduce. Therefore, the period of such monetary policy implementation is obviously longer than that of other major economies such as the Federal Reserve. This is partly because China’s financial market is relatively stable and there is no liquidity crisis, so there is no need to replenish a large amount of liquidity in the short term. On the other hand, the high level of inflation in the past two months has raised concerns about the central bank’s aggressive easing. As the economy gradually recovers, the reduction of inflationary pressure will give monetary policy room for further easing.
ANBOUND’s researchers have judged that after the second quarter, when the Covid-19 outbreak is brought under control, the window for policy adjustment will gradually open, depending on China’s economic recovery. Therefore, the easing of monetary policy by the central bank is actually carried out in a cautious and gradual manner. For now, monetary easing is intensifying as economic recovery becomes the main task ahead. At the same time, monetary policy supports government investment and SMEs in a targeted and direct way, which is more direct and effective than the indirect way of overall easing through the financial system. In the future, with the process of economic recovery, the support for the overall economy is expected to gradually increase, the scope will be gradually relaxed, further RRR cut and liquidity support may be gradually realized.
Final analysis conclusion:
Judging from the results of the State Council executive meeting, the orientation of future monetary policy has become clearer. The intensity of monetary easing will gradually increase, and the balance between economic recovery and economic structure improvement will be achieved through targeted easing.
*Founder of Anbound Think Tank in 1993, Chan Kung is now ANBOUND Chief Researcher. Chan Kung is one of China’s renowned experts in information analysis. Most of Chan Kung‘s outstanding academic research activities are in economic information analysis, particularly in the area of public policy.
*Wei Hongxu, graduated from the School of Mathematics of Peking University with a Ph.D. in Economics from the University of Birmingham, UK in 2010 and is a researcher at Anbound Consulting, an independent think tank with headquarters in Beijing. Established in 1993, Anbound specializes in public policy research.