The State Council, China's cabinet, has pledged to extend loan assistance for smaller businesses next year, allowing them to defer loan payments past the first quarter of next year as needed as part of broader efforts to maintain the consistency, stability and sustainability of macro policies.

The State Council announced a slew of measures aiming to channel more support to small and microsized businesses at its executive meeting on Dec 21, highlighting the necessity for continuous support for the businesses that are still faced with difficulties in their operations.

Under a decision adopted at the meeting, smaller businesses will be greenlighted to further postpone their principal and interest repayments on inclusive loans beyond the first quarter of next year. Inclusive loans granted to small and micro-sized businesses will be extended as much as possible in line with market principles and upon consultations between enterprises and banks.

The government will offer incentives that are equivalent to 1 percent of the loan principal to local banks that provide inclusive loans for small and micro-sized enterprises with a deferred repayment period of no less than six months, the State Council said.

At the meeting, Premier Li Keqiang highlighted the importance of stimulus measures targeting smaller firms that can alleviate funding pressure on businesses, protecting market players and stabilizing the job market.

"We cannot attain the positive growth of the economy this year without support from financial institutions to smaller businesses," he said. China's gross domestic product grew 0.7 percent in the first three quarters of this year, and a number of international financial institutions, including the World Bank, projected the country's economic growth to reach 2 percent.

Data from the State Council suggested that the stimulus policies rolled out during the height of the pandemic have benefited over 3.1 million small and micro-sized firms.

With economic performance gradually returning to normal levels, the Premier said that extending stimulus policies will help smaller firms better respond to changes in their domestic and external environments and restore their production and operations.

The State Council's measures followed a policy stance adopted by the Central Economic Work Conference earlier this month, which stressed the need to maintain necessary support for economic recovery next year, ensure relief measures are more targeted and effective and avoid sharp U-turns in policies.

Policymakers at the conference said a prudent monetary policy must be pursued in a more flexible, tailored and appropriate way next year, with steps to ensure a stable macro leverage ratio and replenish the capital of banks via multiple channels.

The State Council meeting also vowed to extend the inclusive loan support program beyond the end of this year, without providing exact time frames. It added that eligible local banks will also be offered funding support for their issuance of inclusive credit loans to micro and small enterprises.

Wen Bin, chief analyst with China Minsheng Bank, said it is important for the government to weigh the effect of support policies, the demand from market players and social effects in deciding whether, when and how to withdraw stimulus policies in response to COVID-19.

As for the support policies targeting smaller firms, he noted that the government should consider whether the withdrawal of such policies will cause large-scale defaults and whether smaller banks can continue to obtain support through monetary policies to better help the development of smaller firms.

Liang Si, a researcher with the research institute of the Bank of China, said the decision from the State Council to extend stimulus policies for smaller firms will help alleviate their financial burdens and avert risks of loan defaults.

He noted that the nonperforming loan ratio of commercial banks in the third quarter has reached 1.96 percent, the highest level in recent years.

"Even though the most difficult period of the economy is behind us, the foundation of the economic recovery is not yet stable, and many businesses have not shaken off their predicaments," he said.

The latest policies have also offered banks greater autonomy, encouraging them to negotiate details of debt deferrals that will increase the flexibility of asset management of banks and reduce financial risks, he said.