Chinese banks urged to accelerate lending as economy grinds to a halt

New credit as a percentage of GDP has plunged to a near-three-year low in June.

Bloomberg reports that China’s banking and insurance regulator is urging lenders to accelerate lending for small firms as the second largest economy slows down following the country’s extensive crackdown on financial sector risk.

The regulator prodded financial institutions to "earnestly implement" plans to reduce financing costs for small firms, adding that big lenders should "take the lead" whilst the central bank is reportedly planning to use its Medium-term Lending Facility (MLF) to encourage bank loans and investment in lower-rated corporate debt.

Also read: Chinese banks brace as more reserve cuts loom to boost credit-short SMEs

New credit as a percentage of GDP has plunged to a near-three year low in June as Beijing’s campaign to clamp down on risk has dampened economic output, resulting in slower growth and factory activity.

“We have seen strong indications that Beijing could be shifting from mere policy easing measures to a new round of stimulus to avert a credit squeeze and economic growth slowdown," Lu Ting, chief China economist at Nomura International Ltd in Hong Kong, wrote in a report.

Also read: Chinese entrusted loans plunge 3.5% in January-April as banks shun shadow finance

The People’s Bank of China (PBOC) will provide commercial banks with the same amount of MLF funds for the portion of their lending exceeding the monthly loan quota and for investment in corporate bonds rated AA+ and above, according to the report.

The PBOC also cut the reserve requirement ratio (RRR) by 0.5% for the third time this year in a development that could boost the growth amibtions of SMEs seeking financing. The move might also alleviate refinancing risks which have been on the rise for private Chinese firms after accounting for 61.5% of the 13 onshore issuers that have defaulted since the start of the year, added BMI Research.

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