Caixin View: Policymakers Face Uphill Battle to Boost Funding for Small Firms
With the financial de-risking campaign restricting banks’ off-balance sheet lending and affecting liquidity in the interbank market, smaller private enterprises and those with low credit ratings are finding it increasingly difficult to access financing. Improving funding for smaller companies has become a key government priority, and policymakers have been stepping up support measures. But this is such an entrenched problem, and not just in China, that it will be tough to make much progress in the short term.
Last week, the People’s Bank of China (PBOC) issued guidelines to incentivize banks to buy lower-rated corporate bonds, sources with knowledge of the matter told Caixin. The guidelines built on a June announcement that central bank was broadening the kinds of collateral it would accept from lenders applying for loans through its Medium-term Lending Facility (MLF) with the aim of increasing support for smaller firms. Under last week’s guidance, the PBOC said it would provide additional funds to commercial lenders who invested in corporate bonds in July, particularly those who bought bonds with credit ratings of AA+ or lower.
The banking and insurance regulator (CBIRC) is also urging larger banks to lead smaller ones in lending to small and micro-sized enterprises. At a meeting last Tuesday (link in Chinese) it compared big banks to geese who should be guiding the whole flock to help finance-starved areas of the economy.
There are good reasons why banks are reluctant to lend to such enterprises:
1) Many of these smaller businesses are simply just too risky to lend to, or lack adequate collateral to get access to loans.
2) Making riskier loans to smaller enterprises drags down banks’ capital adequacy ratios because they have to make higher loan-loss provisions; this was a major reason for their reliance on off-balance sheet financing in the first place.
3) Banks are under extra pressure to reduce risk, rein in lending, and clean up their balance sheets because of new asset management rules, and will need time to get used to the tougher regulatory environment. As a result, the availability of liquidity will be even more constrained over this adjustment period.
Reason 1 is perhaps the most intractable and the least responsive to policy changes, and is too broad a topic to be addressed here.
Reason 2, capital adequacy ratios, is a more likely target for government policy in the second half of 2018. We expect more measures to help banks raise capital to strengthen their balance sheets, giving them room to make the extra provisioning needed to take on higher-risk lending to smaller enterprises. These measures will likely build on those that emerged in February this year when banks were given permission to sell perpetual bonds to increase what’s known as Additional Tier 1 (AT1) capital. This was a faster and more flexible method of raising Tier 1 capital than issuing preferred shares, the most common method.
Reason 3, adjustment to new asset management rules, will likely only be a short to medium-term issue, as banks learn to adjust to the new regulatory environment and develop new, less-risky products that fit with the updated requirements. Once the banks settle down in the new regime, stability will return and we may see more money flowing into products that support smaller companies.
We see only limited success for government incentives and policies for financing smaller companies. One reason is the government’s de-risking agenda, which is partially responsible for small businesses’ financing problems in the first place. As we argued last week, there was nothing in the economic data for the first half of 2018 that would likely warrant a significant change in focus away from deleveraging and reducing financial risks. Although growth in infrastructure investment slowed sharply, this didn’t have a significant effect on GDP growth or on employment. Consumption continued to contribute a major part of growth, indicating some positive structural changes are taking place in the economy.
Although the authorities may tinker with liquidity and offer incentives to lenders, small businesses’ financing woes aren’t going away anytime soon.
Finance & Macro
China’s central bank issued guidelines on Friday to regulate financial institutions’ asset management business, offering some leeway in implementing broad new asset management rules published in April.
Draft rules for China’s 21 trillion yuan ($3 trillion) wealth management business published Friday would set stricter requirements on banks for raising and investing funds from their clients.
China should increase fiscal spending and fine-tune its crackdown on off-balance-sheet banking activities to bolster weakening economic growth, a central bank-linked newspaper on Friday quoted analysts as saying, ratcheting up a rare public debate between policymakers.
China’s main policy bank revealed that it has tightened its review process for low-cost loans for its shantytown redevelopment strategy after concerns mounted that local governments were exploiting it to fund unrelated projects while racking up unsustainable debts.
China’s banking regulator fined 798 banking institutions a combined 1.4 billion yuan ($201 million) in the first half of this year. The China Banking and Insurance Regulatory Commission (CBIRC) also banned 175 people from the banking industry — in some cases for life — in the first half, compared with 270 in all of 2017.
China’s currency continued to weaken against the U.S. dollar last week and hit its lowest level in a year on Thursday as escalating trade tensions between China and the U.S. eroded market sentiment. Investors are also betting on monetary easing.
China and the EU announced Monday that they are uniting to fight trade protectionism to ensure the world economy remains open, as the two sides seek to strengthen relations amid intensified trade tensions with the U.S.
The China Securities Regulatory Commission (CSRC) will promote Shen Bing, deputy director-general of its international affairs department, to lead the department, sources close to the matter told Caixin. The CSRC’s international affairs department played a leading role in designing the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect programs. It also helped push forward the inclusion of Chinese A-shares in the MSCI Emerging Markets Index.
Chinese investors may get their chance to buy shares in smartphone maker Xiaomi Corp. after all, following talks between the two mainland bourses and the Hong Kong Stock Exchange on Wednesday.
China Tower Corp. Ltd., operator of the cellular base stations used by the nation's three wireless carriers, plans to raise up to $8.7 billion in a Hong Kong IPO, in what is likely to become the world's biggest listing this year.
Bosses of online peer-to-peer (P2P) lending platforms have been warned against disappearing with their customers’ money, as a wave of missed payments and company closures has sparked panic among investors.
HNA Infrastructure Co.Ltd, a Shenzhen-listed unit of HNA Group, agreed to sell an uncompleted mixed-use real estate project in Shenzhen for 1.6 billion yuan ($240 million) to a local wealth management company.
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