23 July 2019
China's central bank aims to spur lending to needy enterprises, but will at the same time press on with efforts to promote deleveraging. Photo: Reuters
China's central bank aims to spur lending to needy enterprises, but will at the same time press on with efforts to promote deleveraging. Photo: Reuters

PBoC moves don’t mean halt of deleveraging policy

The People’s Bank of China (PBoC) has cut the reserve requirement ratio in a targeted way, and then lowered re-lending rates to small enterprises.

Would that be sign of a “U-turn” in China’s deleveraging policy?

Alibaba Group founder Jack Ma clearly does not think so.

Ma stressed in an internal meeting that many entrepreneurs are underestimating the resolution of the top Beijing leaders.

“I’ve also told my colleagues that if I’m telling them something repeatedly, like seven or eight times, they better take it seriously. I may not be able to make it happen right away, but I will figure out the way sooner or later,” Ma said, suggesting that the business sector should similarly pay attention to what Chinese president Xi Jinping is saying.

“If a national policy has been reiterated many times, you must be careful.”

The e-commerce tycoon added: “Once the authority has decided to go ahead with deleveraging and reduction of capacity, it is unlikely to reverse. But given the size of the country, it will take two to three years for the government to fully implement the policy.”

Indeed, President Xi and top policymakers have repeatedly stressed about the importance of cutting excessive capacity, destocking, deleveraging, lowering costs and improving weak links.

China unveiled a 4-trillion-yuan bailout package in the wake of the 2008 global financial crisis. Since then, local government debt, shadow banking, off-balance-sheet lending and illegal fund-raising have become rampant.

To diffuse the potential bomb, which could shake the very fundamentals of the economy, Beijing won’t easily give up, even in the face of near-term pressure from rising corporate defaults and looming US-China trade war.

The PBoC said over the weekend that it would cut the amount of cash that some banks must hold as reserves by 50 basis points. The move would pump 700 billion yuan liquidity into the system. Yet large lenders are required to use the money to conduct debt-for-equity swaps, in order to ease debt burden of those state-owned enterprises.

Smaller banks are required to use the funds for lending to small and micro enterprises to help ensure a steady job market, considering that small and micro companies hire around 80 percent of China’s total working population.

Then on Monday, the central bank cut re-lending interest rates for small and micro enterprises by 50 basis points. The move is aimed at supporting small companies as well as sectors related to the agricultural sector.

Both the easing steps are designed to strengthen the real economy. Rather than interpreting them as policy easing, the measures are more about paving and smoothing the way for deleveraging to deepen further.

This article appeared in the Hong Kong Economic Journal on June 21

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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