China’s central bank steps up effort to boost lending

Bloomberg

China’s central bank has started actively encouraging banks to extend more credit by taking a softer stance on loan quotas, people familiar with the matter said, as authorities ratchet up efforts to bolster a cooling economy.
The People’s Bank of China (PBOC) has delivered the message via so-called window guidance, said the people, who asked not to be named discussing private information. The central bank hasn’t provided specific targets, but it indicated a willingness to be more flexible on banks’ government-imposed lending caps, the people said.
While China has taken several steps to free up credit in recent weeks, the central bank’s latest interactions with lenders suggest official efforts have intensified. One executive at a large state-owned bank said the firm exceeded its year-to-date lending quota, judging that the PBOC would be less strict in enforcing the cap. A smaller bank focused on small-business lending had its quota raised by more than 50 percent in August from the previous month, a person with knowledge of the matter said.
“Banks have decent capacity to lend, with abundant liquidity in the system and the regulators relaxing quota and lending rules,” said Aidan Yao, a senior economist at AXA Investment Asia Ltd. in Hong Kong. However, they still prefer lending to the public sector, so it isn’t yet clear how effective the government’s measures will be, Yao said.
Less than two years after Xi Jinping’s government began a campaign to curb risky lending practices and rein in China’s record debt burden, regulators are tapping the brakes on their crackdown as the $12 trillion economy slows and Donald Trump threatens to slap more tariffs on Chinese goods.
More flexible quotas would make it easier for banks to boost small-business lending from the weakest pace in three years and offset an unprecedented contraction in China’s shadow-finance sector. Increased lending would also help improve sentiment in the country’s equity and credit markets, which have slumped amid trade jitters and rising defaults.
The PBOC couldn’t immediately comment on the matter.
Chinese authorities have already taken several other steps to ease financial conditions and bolster the economy, while stopping short of broad-based fiscal or monetary stimulus.
The moves have included three cuts to banks’ reserve-ratio requirements this year, relaxed capital restrictions for some lenders, and new rules for the shadow-finance industry that proved less restrictive than many analysts had
anticipated. A statement from China’s top governing body emphasised the need to make economic policies more flexible, adding to signs that Xi’s government is increasingly focused on supporting growth.
In China, the central bank sets an undisclosed quota for overall credit growth and decides how much each bank can lend by looking at metrics including capital adequacy ratios, liquidity conditions and provisions for bad loans — part of its so-called macro prudential assessment framework.
Higher quotas, or relaxed enforcement of existing quotas, would allow some banks to take fuller advantage of recent policy tweaks that reduced their capital requirements.
While critics of a more relaxed approach worry that it could set back efforts to put China’s debt on a more sustainable path, investors with shorter time horizons would likely cheer any effort to ease lending constraints.