Central Bank of China to Buy Bank Loans to Ignite Lending to Small Firms | Financial Buzz

Central Bank of China to Buy Bank Loans to Ignite Lending to Small Firms

According to Reuters, China’s central bank will begin buying bank loans by local lenders to small firms this week to attempt to prod banks to lend up to 1 Trillion Yuan or USD 140.18 Billion to small businesses amidst the coronavirus pandemic. 

The PBOC (People’s Bank of China) will utilize 400 Billion Yuan special relending quota to buy the loans on a quarterly basis from banks that qualify.  I.E. commercial banks, private banks, etc.  Qualifying banks need to buy back the loans after a year and the PBOC will not bear the credit risks if loans go sour. 

“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.”

In a separate statement, the PBOC requested that banks shift their business focus from lending to property firms and local government financing vehicles that fund infrastructure projects to small businesses.  The Chinese economy fell 6.8% in the first quarter compared to last year.  It is anticipated that it will take months before the broader activity returns to pre-coronavirus levels even if a new wave of infections can be avoided. 

The PBOC has announced that it will provide 40 Billion Yuan in relending funds and conduct interest rate swaps with local banks through a special purpose vehicle in order to help banks extend loan payments for small firms.