China central financial institution pledges extra coverage help as financial institution lending slides

By Kevin Yao and Yawen Chen

BEIJING (Reuters) – China’s central bank on Sunday pledged to further support the slowing economy by spurring loans and lowering borrowing costs, following data that showed a sharp drop in February’s bank lending due to seasonal factors.

The central bank is widely expected to ease monetary policy further this year to encourage lending especially to small and private firms vital for growth and job creation.

The central bank’s “prudent” monetary policy will emphasize on counter-cyclical adjustments, said People’s Bank of China (PBOC) Governor Yi Gang, using a phrase that implies the need to fight an economic slowdown.

“The global economy still faces some downward pressure and China faces many risks and challenges in its economy and financial sector,” Yi said at a press conference on the sidelines of the country’s annual meeting of parliament.

There is still some room for the PBOC to cut reserve requirement ratios (RRRs), although the amount of room is less compared with a few years ago, Yi said.

The PBOC has cut the amount of cash that commercial banks need to set aside as reserves five times in the past year to spur lending to small businesses in the private sector. The RRR for big banks is now at 13.5 percent and the ratio for small- to medium-size banks is at 11.5 percent.

Yi said lending rates for small firms are still relatively elevated due to higher risk premiums and the central bank will forge ahead with reforms to lower such risk premiums.

High risk premiums on loans to small firms reflect commercial banks’ traditional reluctance to extend credit to the sector because of concerns about their creditworthiness.

PBOC data on Sunday showed new bank loans in China fell sharply in February from a record the previous month, but the drop was likely due to seasonal factors, while policymakers continue to press lenders to help cash-strapped firms stay afloat.

A pull-back in February’s tally had been widely expected as Chinese banks tend to front-load loans at the beginning of the year to get higher-quality customers and win market share.

Chinese banks made 885.8 billion yuan ($131.81 billion) in net new yuan loans in February, down sharply from a record 3.23 trillion yuan in January, when several other key credit gauges also picked up modestly in response to the central bank’s policy easing.

Yi said combined January-February new loans and total social financing (TSF), a broad measure of credit and liquidity in the economy, could paint a more accurate picture as they showed a rise of 374.8 billion yuan and 1.05 trillion yuan from a year earlier, respectively.

DEBT DEFAULTS

Analysts say China needs to revive weak credit growth to help head off a sharper economic slowdown this year, but investors are worried about a further jump in corporate debt and the risk to banks as they relax their lending standards.

Corporate bond defaults hit a record last year, while banks’ non-performing loan ratio notched a 10-year high.

Pan Gongsheng, a vice governor at the PBOC, told the same briefing that China will control the amount of bond defaults in 2019, using both legal and market means.

Pan conceded that bond defaults increased last year, but the level of defaults was not high compared with China’s average bad loan ratio.

Premier Li Keqiang told parliament on Tuesday that monetary policy would be “neither too tight nor too loose”. Li also pledged to push for market-based reforms to lower real interest rates.

Chinese policymakers have repeatedly vowed not to open the credit floodgates in an economy already saddled with piles of debt – a legacy of massive stimulus during the global financial crisis in 2008-09 and subsequent downturns.

Sources have told Reuters the central bank is not ready to cut benchmark interest rates just yet, but is likely to cut market-based rates.

Yi said the downward trend in TSF has been initially curbed and broad M2 money supply growth will be more or less in line with nominal gross domestic product growth in 2019, Yi added.

Central bank data showed growth of outstanding TSF, a rough gauge of broad credit conditions, slowed to 10.1 percent in February from January’s 10.4 percent, versus a record low of 9.8 percent in December.

M2 money supply grew 8.0 percent in February from a year earlier, missing forecasts, the central bank data showed. Yi said China’s macro leverage ratio, or the amount of debt relative to GDP, was at 249.4 percent at the end of 2018, a fall of 1.5 percentage points from a year earlier, Yi said.

Analysts note there is a time lag before a jump in lending will translate into growth, suggesting business conditions may get worse before they get better.

Most economists expect a rocky first half before conditions begin to stabilize around mid-year as support measures begin to have a greater impact.

China’s economic growth is expected to cool to around 6.2 percent this year, a 29-year low, according to Reuters polls.

Growth slowed to 6.6 percent last year, with domestic demand curbed by higher borrowing rates and tighter credit conditions and exporters hit by the escalating trade war with the United States.

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