China will focus on improving financial services to micro, small and medium-sized enterprises, and special local government bonds will be allowed to appropriately support medium and small banks in replenishing capital, according to the State Council executive meeting on July 1.

The meeting also adopted the draft regulation on ensuring payments to SMEs to protect their legitimate rights and interests.

"Both of the decisions are to protect market entities through concrete measures, and help them tide over the current crisis. This is also a prominent requirement for the steady economic recovery this year against the impact of the epidemic," Premier Li Keqiang said at the meeting.

Although no specific quantitative indicators for GDP growth were set in this year’s government work report, goals such as creating more than 9 million urban jobs and stabilizing hundreds of millions of market players are all closely related to economic growth, Premier Li added.

"Market players are the most important forces for ensuring employment, which helps to keep stable economic fundamentals and achieve this year’s economic and social development goals."

Small and medium-sized banks indispensable to micro, small and medium-sized enterprises

"One of the outstanding difficulties faced by small and medium-sized banks today is insufficient capital and limited ability to issue loans," Premier Li said.

"Special local government bonds will be allowed to appropriately support medium and small banks in replenishing capital, ensuring six priorities and six fronts, especially the development of micro, small and medium-sized enterprises and private enterprises."

A set amount of newly added local government special debts will be spared, allowing local governments to subscribe to convertible bonds in accordance with laws and regulations, as an effort to explore new ways to appropriately support medium and small banks in replenishing capital, the meeting decided.

To tackle the current risks and challenges and ensure six priorities and six fronts, it is necessary to improve financial services to micro, small and medium-sized enterprises, Premier Li stressed.

"Although it requires State-owned commercial banks to play an important role in improving financial services to micro, small and medium-sized enterprises, we should acknowledge that small and medium-sized banks have extensive connections to micro, small and medium-sized enterprises, especially start-ups, and are indispensable for their development."

Local government bonds should be paid off

Premier Li emphasized the principle of appropriateness in capital replenishment for small and medium-sized banks.

Local governments were urged to give priority to supporting small and medium-sized banks that are capable of sustainable market-based operations, thus enhancing their ability to support micro, small and medium-sized enterprises financially and ensuring employment, Premier Li said.

Small and medium-sized banks should complete their governance and internal control mechanisms, upon which they can acquire capital replenishment.

The Premier added that a market-based exit mechanism should be established for special bonds.

"Local government bonds are government-issued debts, therefore must be repaid," the Premier said. A benign circle with capital flowing in and out must be formed to guard against moral risks, he added.

The Premier said that local governments, banks, shareholders and financial authorities must be committed to their respective duties. Based on a comprehensive inventory of assets and capital, risk investigation and strict accountability in accordance with laws and regulations, local governments should steadily replenish capital for each bank using a suitable method, and fully explore other resources for support, the Premier added. Meanwhile, supervision and auditing of the full process must be strengthened.

"The main purpose of this policy is to appropriately replenish capital of small and medium-sized banks and enhance their services to micro, small and medium-sized enterprises," the Premier said. "Local governments and departments must fulfill their jobs and jointly figure out a new way to carry out measures."

Premier Li urged the heads of related departments to quickly come up with measures to carry out the plans on the ground.

He also said officials should act fast with confidence and perseverance.