Beijing Rolls Out Measures to Lower Corporates' Financing Costs

In an effort to boost credit, Beijing has rolled out ten measures aiming to lower corporates' financing costs, among them is easing of loan-to-deposit rules.

"We think these measures are responses to the disappointing activity and credit data released last week," said a BofA Merrill Lynch Global Research report.

Chinese banks are allowed to lend a maximum of 75 percent of deposits. The new ratio would increase lenders’ ability to extend credit.

The BoFAML report highlights several reasons that have caused high funding costs for Chinese corporates. Among the reasons is that China's loan quota makes credit for borrowers other than those big SOEs quite limited.

"Some improper monetary operation in 2013 contributed to too high interbank rates which in turn translated into higher costs for final borrowers," said the report.

Financial innovations, especially internet-based money market funds, also raised lenders' funding costs and partly transferred rising costs to borrowers. 

The report notes that the ten measures announched by Beijing in general are still lacking implementable details, but two measures could lend support to corporates.

First, a more flexible loan-to-deposit ratio could bolster credit growth. Second, easing on cross-border financing would allow Chinese corporates to take advantage of the low financing costs overseas. 

"We believe it's time for the government to consider cutting reserve requirement ratios (RRR) to increase liquidity supply. The government might also need to cut the too high benchmark lending rates, though we reckon that the chance for the PBoC to cut rates is still below 50%." 

Ten detailed measures

1. Increase loan-to-deposit ratio flexibility and improve the write-off policy of NPLs of Micro and Small Enterprises (MSEs). Boost the ability of financial institutions to increases loans to MSEs and the agriculture sector.

2. Speed up private banks development and provide multi-level financial services through community and micro-branches and phone banking. Encourage the internet finance industry to provide better services to MSEs and the agriculture sector.

3. Support the development of guarantee and re-guarantee institutions and introduce pilot programs for guarantee on small loans.

4. Adjust the assessment mechanism for commercial banks in order to prevent the problem of favoring big companies over small ones and charging unreasonably high rates and fees when lending.

5. Use credit assets securitization to revitalize funds and simplify the debt issuing procedure for MSEs and companies in the agriculture sector.

6. Introduce reforms on stock listings. Remove continuous profit requirements on new listings and lower listing threshold for MSEs. Conduct equity crowd funding trial.

7. Support cross border financing and connect more companies with cheap funding globally. Create new ways of using FX reserves to support the development of the economy and facilitate the "going out" strategy.

8. Improve the credit system and increase the transparency of MSEs credit condition in order to make borrowing of good credit companies easier.

9. Speed up interest rate reform to let the market determine the interest rate. Guide financial institutions to adjust high lending rate

10. Improve the supervision and accountability mechanism, stop nonstandard charges and illegal fund-raising from pushing up financing costs. Create a good financing environment to enhance business confidence and the ability to compete.


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