PBOC to Buy 400 Billion Yuan of Microloans from Banks

China’s central bank started buying microloans Monday from qualified local lenders, aiming to spur banks to lend as much as 1 trillion yuan ($140.2 billion) to small businesses amid the Covid-19 pandemic.

The move implements a pledge in Premier Li Keqiang’s 2020 government work report to use innovative monetary policy tools to directly stimulate the real economy.

The central bank will use 400 billion yuan under a special relending quota to purchase the loans. Banks need to buy back the loans at the original amount after a year, the People’s Bank of China (PBOC) said on its website. The central bank would not bear the credit risk or collect interest for such loans, the PBOC said.

Qualified banks include city commercial banks, rural commercial banks, rural cooperatives and private banks that make 40% of their new loans to micro and small businesses between March 1 and Dec. 31. Such loans must have maturities of at least six months.

This is equivalent to a zero-interest loans jointly made by the central bank and local banks, with the central bank bearing no risk but providing funds for a certain period, said Wang Yifeng, chief banking analyst at Everbright Securities Co.

By buying the loans, the central bank can get a better idea where the funds flow to achieve the goal of direct stimulus to the real economy, analysts said.

Since local lenders still have to bear the risks and the microloans are unsecured, even with the central bank’s zero-interest financing there’s uncertainty about how enthusiastic banks will be, said Qu Qing, chief economist at Jianghai Securities.

The PBOC said banks must increase credit allocations to small and micro businesses, optimize risk assessment, reduce dependence on collateral, support more small and micro businesses to obtain unsecured credit, and make sure their micro loan proportion expands significantly in 2020.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com)