China Pledges US$69 Billion In Credit Backing For Tech After Resurrecting Dormant Financial Tools

China has announced it would renew the use of two relending tools previously levied to mitigate the shocks from the coronavirus pandemic, providing a combined 500 billion yuan (USD69.1 billion) in incentives for loans undergirding tech innovation and large-scale equipment upgrades – two areas that have been made explicit economic priorities by the country’s leadership.

The move has prompted guessing from market players over the extent to which authorities are willing to engage in monetary loosening, especially as the US Federal Reserve has delayed its anticipated interest rate cuts and the Chinese economy leaves the first quarter of 2024 on stronger footing.

Under the new programme, the People’s Bank of China (PBOC) will offer relending facilities to 21 banks at a rate of 1.75 per cent and a term of one year.

The refinancing will cover 60 per cent of the principal for qualifying loans to tech-based small and medium-sized enterprises, and can be extended twice for an additional year each time, the central bank said in an online statement.

“[The loans] will guide financial institutions to provide credit support to tech-focused enterprises in their start-up and growth phases, as well as projects focusing on digitalisation, intelligence enhancement, high-end upgrades, eco-friendly technological transformation and equipment renewal in key sectors,” it said.

The PBOC had 17 structural support tools in active use by the end of last year, with an cumulative outstanding size of 7.5 trillion yuan – 16.4 per cent of central bank assets.

These targeted monetary levers came to greater attention in 2014, when pledged supplementary lending was first used to provide direct loans to commercial banks in efforts to renovate outdated residential blocks.

Of these, 13 – including loans and relending for small businesses, toll roads, private firms, property delivery, logistics and carbon emissions reductions – were launched as temporary measures during the pandemic. Seven have already expired.

The previous relending tool for tech, carrying a quote of 400 billion yuan, began in April 2022 and has since expired. The earlier equipment renovation tool, with a quota of 200 billion yuan, was in active use from September to December of 2022.

“The structural monetary policy tools are primarily operated by large banks, while the actual recipients of loans are mainly SMEs,” said Zong Jiani, an analyst with China Foreign Exchange Trade System, in an article last month.

“When aiming to achieve credit expansion through monetary policy, it is essential to prioritise the use of traditional policy tools, especially interest rate cuts and comprehensive reserve requirement reductions,” she wrote.

The relending programme follows guidance Beijing had previously set for domestic banks, urging them to provide funding for five types of finance deemed essential by President Xi Jinping: technology finance, green finance, inclusive finance, pension finance and digital finance.

It also falls in line with the need for large-scale equipment upgrades mentioned at the February meeting of the Central Financial and Economic Affairs Commission, a goal which serves dual purposes: turning the country’s sizeable fixed-asset investment into a source of stimulus, and advancing its enormous manufacturing sector.

Structural tools like the relending programme are intended to aid China as it grapples with a persistent slump in the property market and weak investor confidence, both of which will test the country’s ambitions to grow its economy by 5 per cent this year.

“[These] tools are receiving more attention,” wrote Wang Qing, an economist with Golden Credit Rating, in a note on Sunday.

“[They] are not only a way to invest base money supply, but also can guide the flow of funds more accurately.”

As the central bank highlighted countercyclical adjustments during its meeting at the end of March, more action – including cuts to the reserve requirement ratio and policy rate – will be seen in the coming months to help stabilise national economic growth, he said. – SCMP

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