July 23, 2014 / 12:55 PM / 3 years ago

UPDATE 1-China pledges more financial aid for small firms

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(Adds quotes and details)

BEIJING, July 23 (Reuters) - China will boost support for small companies and the farming sector by getting commercial banks and the central bank to disburse more loans to them, the cabinet said on Wednesday.

Chinese authorities have steadily loosened monetary and fiscal policies this year to energise the world's second-largest economy, even though they have avoided saying so in public, preferring instead to couch any changes as "fine-tuning".

After a weekly meeting chaired by Premier Li Keqiang, the State Council said many small Chinese companies still face financing difficulties, which could fuel risk in the economy.

So the cabinet said the central bank would raise the sizes of its "re-lending" and "re-discount" programmes to step up the supply of funds to smaller companies and the farm sector.

The central bank's "re-lending" exercise issues loans directly to commercial banks, which in turn lend to businesses. The "re-discount" programme requires the central bank to inject funds into commercial banks by buying their bills. Commercial banks then lend the money on to companies.

"The total scale of credit supply is not small, but companies, especially those smaller ones, are still facing financing difficulties," the cabinet said.

"This not only exerts a heavy burden on firms, it also weakens the effect of macroeconomic policies and brings about financial risks," the cabinet said in an online statement.

To alleviate the financing challenges of smaller companies, the cabinet told banks to cut the time taken to approve loans.

More financing avenues and credit insurance services would be developed for smaller companies, it said, with financial institutions created to cater to their needs.

Though the cabinet said China's interest rates market would be gradually freed up to let banks price their lending risks better, other remarks suggested that authorities will limit banks' latitude to run their businesses.

Benchmarks for measuring banks' success will be revised to ensure they are not only focused on maximising profits and growing assets, the cabinet said, but gave no further details.

Furthermore, it said, financial institutions must not try to attract savings by setting excessively high deposit rates. Unnecessary financial intermediaries will also be cleared from the market to cut companies' borrowing costs.

"We will continue to implement prudent monetary policy and keep credit supply growing at an appropriate rate, while improving the credit structure and intensifying the strength of the re-lendng and re-discount programmes," the cabinet said.

Pro-growth measures taken by China include lowering the amount of cash some banks are required to hold as reserves, and getting banks -- which are controlled by the government -- to step up lending to a level unseen since the 2008/09 financial crisis. (Reporting by Aileen Wang and Koh Gui Qing; Editing by Clarence Fernandez)

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