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How China’s central bank is coming to SMEs’ rescue

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While the market is trying its best to guess how many cuts in the reserve ratio requirement to expect in China this year, the Chinese central bank has managed to tweak its strategy. Facing the pressure of a slowdown in the Chinese economy and dissatisfaction among corporations, especially private firms, the People’s Bank of China rolled out two new monetary policy instruments in late January.

On January 23, the Chinese central bank deployed its targeted medium-term lending facility for the first time, with tenors of up to three years and an interest rate that is 15 basis points lower than that on medium-term lending facility loans. The PBOC has stated that the new lending tool is directed at encouraging commercial banks to provide credit support to private and small firms. In other words, it is offering banks a carrot to increase their risk exposure to the private sector.

Just one day later, the PBOC announced the creation of another new instrument, the “central bank bills swap”. The scheme allows financial institutions that own perpetual bank capital bonds to swap them with PBOC bills. The bills have a tenor of up to three years, and financial institutions will still get yields on the perpetual bonds during this period.

Chinese regulators had just given commercial banks the green light to issue perpetual........

© South China Morning Post