Business Maverick

China Steps Up Monetary Support as Economy Takes Hit from Virus

People's Bank of China in Beijing. Photographer: Qilai Shen/Bloomberg
By Bloomberg
02 Sep 2021 0

China ramped up financial support for small businesses and pledged better use of local government bonds as the economy showed further signs of a slowdown because of tight property controls and fresh virus outbreaks.

The People’s Bank of China will provide 300 billion yuan ($46.4 billion) of low-cost funding to banks so they can lend to small and medium-sized companies, according to a statement released after a Wednesday meeting of the State Council, China’s equivalent of a government cabinet. Other measures include interest subsidies to firms hit hard by the pandemic and a bigger role for local special bonds in driving investment.

The increase in support suggests Beijing is becoming more concerned about the growth outlook, with economists expecting the central bank to provide more targeted support in coming months, like cutting the reserve requirement ratio for banks again. Purchasing managers’ surveys released this week showed a bigger-than-expected drop in economic activity last month as the government imposed stringent measures to bring virus cases under control.

Caixin manufacturing gauge fell to the lowest level since Feb 2020

“As evidence of a growth slowdown increases, we think Beijing is inching closer towards stepping up policy support,” Lu Ting, chief China economist at Nomura Holdings Inc in Hong Kong, wrote in a note. Policy makers “on the one hand will be increasingly dovish” while on the other, continuing to maintain restrictions in the property sector and high-polluting industries, he said.

The cabinet said it will “reinforce its policy options,” improving the ability to cope with challenges to ensure a stable economy and employment, according to the statement.

Recently, tighter control of the property sector, a slowdown in export demand and measures introduced to combat an outbreak of the delta variant of coronavirus have undercut the economy. Beijing has signaled in recent weeks that it will selectively loosen monetary policy to offset that slowdown.

Read more: PBOC Signals Reserve Ratio Cut to Boost Rural Finance

Wednesday’s meeting signals that Chinese authorities remain reluctant to provide any large-scale stimulus for now. The State Council meeting re-emphasized its focus on “cross-cyclical” policy, a phrase analysts have said points to more moderate action with a longer time horizon.

The State Council meeting leaving out any aggregate policies “is somewhat different to market expectation,” Qu Hao, chief economist at Jianghai Securities Co., wrote in a note.

At the end of June, banks had about 888 billion yuan of outstanding loans to small and medium-sized firms funded via the relending facility, according to official data. That is offered at a rate of 2.25% for one-year funds, compared with 2.95% for the more commonly used one-year medium-term lending facility.

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