The Chinese government has been rolling out supportive measures for the private sector.
One of its latest moves is to require banks to allocate a portion of their new lending to privately owned companies.
Vice Premier Liu He said last month that “some organizations believe that it’s safe to provide loans to [state-owned enterprises] and that there are political risks if they offer loans to private firms”.
In a bid to change such a perception and rectify the over-emphasis on state-owned firms at the expense of the private sector, Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, said on Thursday that overall, no less than 50 percent of new loans of the banking sector should be lent to private firms.
The minimum target for large banks in lending to private firms would be a third of total new loans, and for small to medium-sized lenders, two-thirds. Guo aims to reach the targets in three years’ time.
While the initiative is expected to boost private firms by providing them with abundant liquidity, the long-term risks could be considerable. For one, the number of quality companies deserving funding support is limited.
If banks relax their lending criteria in order to meet the lending quota, the size of bad debts could blow out in the coming years.
As such, investors should remain cautious about lenders that are highly exposed to private companies.
This article appeared in the Hong Kong Economic Journal on Nov 9
Translation by Julie Zhu
[Chinese version 中文版]
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