China central bank to buy bank loans to spur lending to small firms worth 1 trillion yuan

BEIJING (Reuters) - China’s central bank is to start buying bank loans made by local lenders to small firms this week to try to prod banks to lend as much as 1 trillion yuan ($140.18 billion) to small businesses amid the coronavirus pandemic.

The Chinese national flag flies at half-mast at the headquarters of the People's Bank of China, the central bank (PBOC), as China holds a national mourning for those who died of the coronavirus disease (COVID-19), on the Qingming tomb-sweeping festival in Beijing, China April 4, 2020. REUTERS/Carlos Garcia Rawlins TPX IMAGES OF THE DAY

The People’s Bank of China (PBOC) will use a 400 billion yuan special relending quota to buy the loans, on a quarterly basis, from banks that qualify, such as city commercial banks, rural commercial banks, rural cooperatives and private banks, it said on its website.

The qualifying banks need to buy back the loans after a year and the PBOC would not bear the credit risks if the loans go sour, it added.

It expects the move to help spur new bank loans to small businesses worth about 1 trillion yuan.

“This move will help boost small banks’ ability to support the real economy, especially small firms,” said Wen Bin, Senior Economist at Minsheng Bank in Beijing.

“This will also help small banks to lower interest rates on loans for small firms.”

The PBOC has long complained about the logjams in its monetary policy transmission mechanism that often sees funds flowing to the property and stock markets.

In a separate statement, the PBOC asked banks to shift their business focus from lending to property firms and local government financing vehicles that fund infrastructure projects to small businesses.

China’s economy shrank 6.8% in the first quarter from a year earlier, the first contraction since quarterly records began. Analysts believe it will be months before broader activity returns to pre-crisis levels, even if a fresh wave of infections can be avoided.

In order to help banks extend loan payments for small firms, the PBOC also announced that it would provide 40 billion yuan in relending funds and conduct interest rate swaps with local banks through a special purpose vehicle (SPV).

The loan extension supporting tool would help banks extend loan principal for about 3.7 trillion yuan, it added.

Premier Li Keqiang said in his work report last month that the government is extending loan payments for small and micro-sized business until the end of March next year.

($1 = 7.13 yuan)

Reporting by Stella Qiu, Kevin Yao and Cheng Leng; Editing by Nick Macfie