China central bank unveils targeted tool to spur lending to small firms

HONG KONG/BEIJING (Reuters) - China’s central bank on Wednesday rolled out a targeted policy tool to spur lending to small and private firms, in the latest step to support the slowing economy amid a trade dispute with the United States.

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To ward off a sharp growth slowdown, the government has in recent months unveiled a raft of policy measures, including cuts in banks’ reserve requirement ratio (RRR) to boost lending, tax cuts and steps to fast-track infrastructure projects.

The targeted medium-term lending facility (TMLF) will provide “long-term stable source of funding for financial institutions based on growth of their loans for small and private firms”, the central bank said on its website.

Large commercial banks, joint-stock banks and big city commercial banks showing strong support for the real economy and meeting macro-prudential requirements will be allowed to apply for the lending facility, the central bank said.

The TMLF will mature in one year but banks will be allowed to roll it over for two more years, the central bank said.

The one-year interest rate on the TMLF will be 3.15 percent, 15 basis points lower than the rate on the medium-term lending facility (MLF), the central bank said.

Analysts at Lianxun Securities said the new policy tool could reduce the possibility of cutting RRR - the level of cash banks must hold as reserve. Further reserve cuts are widely expected after four reductions this year.

Ming Ming, head of fixed income at CITIC Securities in Beijing said the move by the central bank was effectively a targeted rate cut.

The central bank said it would continue to implement a “prudent and neutral” monetary policy to help ensure reasonably ample liquidity and said it would implement targeted policy measures in a more precise and effective way.

Central bank chief Yi Gang said last week that China’s monetary conditions should be relatively loose to support its slowing economy but policy cannot be too loose as falls in domestic interest rates could hit the yuan.

China’s economic growth slowed to 6.5 percent in the third quarter, the weakest pace since the global financial crisis. Data last week showed surprising softness in November factory output and retail sales, indicating momentum is likely to come off further in the current quarter.

The People’s Bank of China will also boost relending and rediscount quotas by 100 billion yuan ($14.50 billion) to help the financing needs of small enterprises, part of measures to strengthen private sector support.

The latest quotas are in addition to another 300 billion yuan that were issued earlier this year, the central bank said on its website

The government has been providing support for small firms and private enterprises, which are vital for economic growth and employment as headwinds rise due to trade frictions with the United States.

Reporting by Meg Shen in Hong Kong and Lee Chyen Yee in Singapore; Kevin Yao in Beijing, Editing by Nick Macfie and Alison Williams