Opinion: Juicing the Engine of China’s Economy
The People's Bank of China recently announced the establishment of new policy instruments to support bond financing for private enterprises. But that does not mean there's been a change in its monetary policy stance. The aim of these measures is to compensate for the financing shortcomings affecting the private-sector economy, and to provide short-term, market-based support for firms that are facing temporary difficulties, but are competitive, have a market for their products, have good prospects, and possess technology.
Private enterprises are the engine of the Chinese economy. From a policy perspective China must, on the one hand, unswervingly strengthen and grow the state sector, while one the other hand, also unswervingly encourage, support, and guide the development of the non-state sector. The establishment of bond financing tools for private enterprises is a specific measure introduced by the central bank to implement the unified plan of the Communist Party’s central committee and the State Council.
With downward pressure on the economy, and facing a complicated situation domestically and overseas, some private enterprises have encountered difficulties raising money and operating their businesses, and there has been an increase in debt defaults. There is a rising mood of risk aversion among some market institutions toward private companies and we have seen some irrational behavior with regard to financing. Against the backdrop of the deleveraging campaign, private enterprises that relied on “shadow banking” for their financing needs in the past are inevitably experiencing some pain as they are forced to turn to the formal banking system. As a result, there is a need for the central bank to roll out targeted measures to support the development of small and medium-sized enterprises and the private economy.
The central bank decided to use the bond market to make a breakthrough in private sector financing because it is relatively open, transparent and can guide expectations. The central bank will provide initial capital support through relending (extending credit lines to banks who relend to customers), and promoting the use of market-based tools such as credit risk mitigation warrants or debt guarantees to support bond issuance by private enterprises. This will send positive signals to the market, boost confidence in investing in private-enterprise bonds, prevent contagion between falling share prices, bond defaults and declining credit, and eventually drive the revival of financing for the private sector.
In order to ensure the successful implementation of the above-mentioned tools, the following principles must be obeyed. The first principle is to follow a market-oriented approach and conduct implementation according to the law. The central bank will not carry out the supporting plan directly itself, but will entrust it to financial institutions. These operations should strictly abide by laws and regulations, and protect the property rights of private enterprises.
The second principle is to have a specific goal and to exit at the appropriate time. These bond financing tools should only be used to help companies help themselves and the focus must be on supporting the reasonable financing needs of private enterprises facing temporary liquidity shortages. Help should be there when and as long as needed, and then withdrawn in an orderly way within a set timeframe.
The third principle is to guard against moral hazard. The central bank will work with local governments to help private enterprises that need support, actively assisting in the formulation of a rescue plan that will improve their business operations and management, and enhance their ability to withstand risks. The central bank will also help firms become more disciplined and guide them to establish standardized mechanisms for corporate governance, financial management and information disclosure.
The central bank will also roll out supplementary guidelines to improve the bond-financing environment for private enterprises. First, we need to guide financial institutions to improve their due-diligence on private-enterprise bond investment, increase their tolerance of defaults, and appropriately raise their risk appetite. Second, we need to encourage companies that provide insurance against the risk of bond default to offer guarantees on private enterprise bonds. Third, we need to develop a market for non-performing bonds and guide professional institutions to participate in trading private enterprise bonds. Fourth, we need to improve the mechanism for dealing with bonds that are in default, enhance the efficiency of disposals by providing more channels for legal remedy, and improve the systems of bondholder committees and trustee management. Fifth we must develop a basic credit derivatives trading market and offer policy support to institutions that participate.
Once again, it must be emphasized that the establishment of private enterprise bond financing support tools does not mean that the PBOC's monetary policy stance has changed. Liquidity in the banking system remains stable, and the central bank continues to operate a prudent, neutral monetary policy. It will not flood the financial system with liquidity, and will ensure adequate funding by making targeted adjustments. It will also guide reasonable growth in broad money supply and total social financing in order to create a monetary and financial environment that fosters high-quality development and supply-side structural reform.
Xu Zhong is director general of the research bureau of the People’s Bank of China.
Translated by Leng Cheng (email@example.com)
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