China's intensified six-month-old campaign to slash the excessive leverage in the banking system threatening its financial stability took a pause with the government ordering banks to "significantly cut" lending rates for small businesses in the third quarter compared to the first.
A non-public notice issued by the China Banking Insurance Regulatory Commission (CBIRC), the banking sector regulator, in late June commanded banks to improve real-time monitoring of lending rates. CBIRC also told banks to keep the asset quality and overall cost of lending to small businesses at reasonable levels.
The People's Bank of China (PBOC), the de facto central bank, does not disclose lending rates for small firms, however.
In addition, China's communist-controlled central government keeps repeatedly harping on the need to better serve the financial needs of China's small and micro-enterprises. Financial analysts said the two recent rounds of targeted reserve ratio cuts were also designed to improve the financial inclusion of these often neglected but numerous enterprises.
All these moves are part of Beijing's painful deleveraging campaign launched in earnest last January. This unrelenting campaign restricts companies from tapping alternative and more dangerous funding sources such as shadow banking. The crackdown on shadow banking has driven up corporate borrowing costs, however.
Large private firms and small businesses are being hit the hardest by the drying-up of capital since their financing costs tend to be much higher than those for state-owned enterprises (SOEs). Recent government surveys confirm that tight funding is crippling smaller manufacturers, as well.
To ease refinancing pressure on small firm, PBOC has had to unleash more cash by cutting banks' reserve requirement ratios by 50 basis points, thereby releasing $108 billion in liquidity.
Economists, however, are more and more concerned this wide-ranging deleveraging plus an escalating trade war with the United States will reduce China's economic growth by 2019.
