Lifeline to small businesses: Will it work?
Zhao Kai, boss of a small advertising business in Shanghai, has been struggling to keep afloat in the aftermath of the coronavirus epidemic.
He has had to reduce two full-time employees to half-time work, leaving himself the only one working full time.
“My business hasn’t been very good in the past few years, and then the coronavirus pandemic came along,” Zhao told Shanghai Daily.
To help small businesses like his survive, the People’s Bank of China announced on June 1 that it will start buying up bank loans made by local lenders to small firms to get the loans off their balance sheets and free up as much as 1 trillion yuan (US$140.2 billion) in new lending to small businesses.
The central bank created a 400-billion-yuan special relending quota to buy the loans, on a quarterly basis, from city and rural commercial banks, rural cooperatives and private banks.
“Our corporate clients, especially foreign-funded enterprises, are cutting their budgets, and we are braced for a much tougher situation than the 2008 global financial crisis,” said Tai Shan, founder and chief executive officer of a small online finance platform called Linked-F.
His company’s revenue in February and March almost halved from a year earlier.
Smaller businesses like his have long had a tough time, with tight cash flows, thin profit margins and difficulty in getting loans from mainstream lenders. That situation has only worsened in the shutdowns that accompanied the pandemic.
The new central bank measure came after officials at the National People’s Congress in late May called for further extensions of loans and enhanced support for smaller companies, who are the largest bloc of employers in China.
The new and unexpected asset purchase plan announced on June 1 demonstrates the importance policymakers are placing on support for small and medium-sized companies as China recovers from the COVID-19 pandemic, said Xing Zhaopeng, China markets economist at Australia & New Zealand Bank.
More than half of the business conducted by local regional banks in China is related to smaller businesses. By buying up their loans and taking them off the balance sheets, the measures will ease the pressure on bank capital and liquidity, Xing noted.
The plan is an extension of measures rolled out between February and May and follows years of often unsuccessful attempts to prod lenders to provide more money to small businesses.
The move will increase base money supply in the banking system, add to bank reserves and help small banks and small businesses survive, according to a research note by Nomura’s global markets team.
Banks must assume all the repayment risk of the loans they will sell to the central bank. In that regard, it’s really just a swap through which the central bank will provide one-year credit to banks, said Chen Ji, a researcher at the Bank of Communications.
In the aftermath of the announcement, the Bank of Ningbo in Zhejiang Province reaffirmed its commitment to strengthening financial support to private firms.
Since the epidemic outbreak, the smaller commercial lender said it has been closely monitoring the financial status of its small corporate clients and has made “timely responses” to their needs.
As of the end of March, 9.1 billion yuan of interest-free loans had been extended to 35,000 small businesses, it added.
The new credit-easing approach is partly the result of an already low reserve requirement ratio for small banks, according to Japanese investment bank Nomura.
As of May 2020, according to the central bank, the weighted average reserve ratio for large banks was 11 percent; for medium-sized banks, 9 percent; and for small banks, 6 percent. The ratio sets the amount of cash reserves banks are required to hold, based on total assets.
Chinese financial data showed there were 38.9 trillion yuan of outstanding small business loans at the end of the first quarter.
The central bank has already unveiled several quantitative easing-style monetary policies to fund government stimulus packages.
But are these policies working their way down to grassroots businesses?
Linked-F’s Tai said there is still a long way to go before well-intentioned policies from the top become practical realities on the ground for small business owners.
For one loan application, Tai said he had to prepare three different sets of documents – one for banks, one for a credit evaluator and one for a local government fund in charge of facilitating loans to smaller businesses.
The whole process was so time-consuming that he gave up halfway through it.
“Borrowing money from banks is not that easy for small companies like us,” he said. “Compared with large state-owned enterprises, we are not the apple of their eyes.”
He applauded Changning District in Shanghai for its timely and efficient services to small companies. During the crisis, he said, his company got more than a 10,000-yuan refund from a collateral firm for a loan, with the help of local officials.
“You see, policies are there,” he said. “The crux is how they are applied.”