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China to deepen market-oriented interest rate reform, lower interest rates for smaller firms’ financing

Zhang Yue
Updated: Jun 26,2019 11:56 PM

China will further cut real interest rates on loans to micro and small enterprises, pilot reform measures regarding financial services for private, micro and small firms, support more intellectual property pledge financing and credit supply for the manufacturing sector, and promote innovation and development of the real economy, the State Council’s meeting chaired by Premier Li Keqiang decided on June 26.

The Chinese government puts great emphasis on financing for micro and small enterprises. General Secretary Xi Jinping has emphasized on multiple occasions the importance of deepening supply side structural reform in the financial sector and increasing financial support for the real economy. Premier Li Keqiang has repeatedly highlighted the need for taking a multi-pronged approach to lower the real interest rate to meaningfully ease financing difficulties facing micro and small enterprises.

It was said at meeting that financing costs for micro and small businesses have been dropping for some time, thanks to the combined efforts made by various authorities in implementing the requirements of the Central Economic Work Conference and the Government Work Report. Going forward, liquidity will be kept reasonably sufficient, and the lending rate for micro and small businesses will be further lowered.

“We will keep the prudent monetary policy neither too tight nor too loose, with anticipatory adjustments and fine-tuning as appropriate, to adapt to shifting dynamics in the international and domestic markets,” Premier Li said.

The meeting decided on the following measures: Market-oriented interest rate reform will be expanded to improve commercial banks’ loan prime rate mechanism and better harness LPR’s role in shaping the real interest rate. Banks will be urged to reduce lending surcharges to help lower financing costs for micro and small businesses.

Small and medium enterprises will be supported in bond and note financing. Regulatory and evaluation methods for commercial banks regarding their financial services for micro and small firms will be refined. The goal is to enhance the banks’ lending capacity to smaller firms. Financial institutions are expected to significantly increase their financial bonds issued for micro and small businesses this year, toward the target of no less than 180 billion yuan.

Policy incentives for cutting loan guarantee fees on micro and small businesses must be fully implemented. The role of the State Financing Guaranty Fund should be harnessed in reducing re-guarantee fees and incentivizing further cuts in guarantee charges.

It was also decided at the meeting that the central government will provide fiscal support, in the form of rewards rather than subsidies, and the three-year, comprehensive pilot reforms concerning financial services for private, micro and small firms in some cities. These pilot reforms will explore ways to expand financing for businesses, make financing easier, lower financing costs, improve the risk compensation mechanism, and support financial innovation to guide more financial resources to smaller companies.

“We must use market-oriented reform measures to see that the real interest rates come down, and reform the transmission mechanism. The purpose of these measures is to deliver concrete benefits to all market players, micro and small businesses in particular, and send a positive signal to the market,” Premier Li said.

To support innovation-driven development, intensify the protection and use of intellectual property rights, and promote employment, the meeting also called for expanding the use of intellectual property pledge financing, to widen financing channels for private, micro, small, start-up and innovation businesses and ease their financing difficulties. Banks will be guided to formulate separate lending plans and evaluation mechanisms for intellectual property pledge loans. The nonperforming loan (NPL) ratio of such lending that is no more than 3 percentage points above the overall NPL ratio will not be considered a minus factor in government oversight or performance evaluation. Packaged intellectual property pledges will be explored, and the scope of collateral and means of disposal will be expanded.

“We must step up building an intellectual property information platform. Intellectual property pledge financing may seem a minor business for financial institutions, yet in practice, it is of vital importance, as it boosts entrepreneurship and innovation, and helps with the protection of intellectual property rights,” Premier Li said.

The meeting required improvements in the loan mix, guiding more credit issuance for the manufacturing and service sectors. Large banks will be encouraged to refine their lending evaluation mechanism and provide targeted rewards to ensure that the balance of total loans, medium and long-term loans, and credit loans for the manufacturing sector this year will be notably higher than last year.