Central Bank Offers More Financial Backing to Small Enterprises

* The policy moves reflect concerns that liquidity tightening is weighing on business

* These measures are expected to provide credit of more than 100 billion yuan

China’s central bank issued guidelines Monday with measures to encourage lending to small and micro businesses in the government’s latest move to expand financial support for small enterprises.

The measures followed the central bank’s decision Sunday to cut some banks' reserve requirement ratios on July 5 to support qualified debt-for-equity swap programs and help small business financing. The State Council outlined a series of policies last week to improve credit availability to small companies.

The policy moves reflect concerns that liquidity tightening is weighing on business, especially small companies that have long struggled with limited access to funding compared with state-backed rivals.

“We have issued policies all needed to support small and micro businesses,” said a central bank official. Additional steps are needed to improve the business environment and coordination with other regulatory bodies in further support of small companies, the official said.

The People’s Bank of China said Monday it would adjust relending and rediscount policies to grant greater credit support for small enterprises. The measures include adding 150 billion yuan ($22.96 billion) of relending and rediscount quotas for small firms and the agriculture sector. The central bank also lowered relending interest rates for small and micro enterprises by 0.5 percentage point, according to a document jointly issued by the PBOC and four other central government departments.

Financial institutions will be encouraged to issue securities backed by small enterprise loans, the document said.

These measures are expected to provide credit of more than 100 billion yuan, the central bank said.

To encourage lending to small businesses, the central bank will expand the tax exemption for financial institutions’ interest income from loans to eligible small borrowers. Loans to small enterprises with credit lines of 5 million yuan or less will be included in the scope of collateral for the central bank's medium-term lending facility operation, according to the document.

The central bank will adjust the macro-prudential assessment framework to give more weight to small business loans, the PBOC said. The central bank also pledged to promote the establishment of privately funded banks in a bid to expand financing for businesses.

Smaller private businesses have been under mounting financial strain amid the national deleveraging campaign, although the central government has repeatedly pledged support. As of early June, 13 companies defaulted on 14.2 billion yuan in corporate debt, already more than half the value of defaults over all of 2017. Private businesses are the main culprits in this year’s bond default cases.

Contact reporter Han Wei (weihan@caixin.com)