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China details stimulus plan, plans targeted RRR cut

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By Addison Gong
01 Apr 2020

China’s State Council has unveiled details on yet another stimulus package to support its economy, including more local government bonds, lower interest for loans and a potential cut in the reserve requirement ratio for smaller banks.

China is working on a package of macroeconomic policies and measures to propel growth amid challenges brought by the Covid-19 pandemic, it said at a Politburo meeting chaired by president Xi Jinping last week.

More details were revealed at a State Council meeting chaired by Li Keqiang, China’s premier, on Tuesday. Among other things, the government said it will “promptly” assign more quotas for the so-called local government special purpose bonds.

So far, China has assigned Rmb1.85tr ($263bn) of early quotas for local governments to issue bonds, with the quotas given at the end of 2019 and earlier this year. Some Rmb1.29tr of those were for special purpose bonds that will fund specific infrastructure and public welfare projects.

The official quotas are usually assigned at the annual Two Session meetings, typically held in March, but currently delayed to an unspecified date because of the pandemic.

According to Wind, Chinese local governments have sold Rmb1.61tr of bonds so far in 2020. The State Council meeting urged the government issuers to print special bonds at a faster pace, and use up the quotas within the second quarter.

Detailed measures targeted at small and micro-sized enterprises were also set out. These include granting Rmb1tr of ‘re-lending and re-discounting’ credit quota to small and medium Chinese banks, and a targeted reserve requirement ratio (RRR) cut for these smaller lenders to boost liquidity.

The People’s Bank of China has already lowered the RRR for a select group of banks – the names of which were not disclosed – on March 16, by 50bp to 100bp, and by another 100bp for qualified joint-stock commercial banks. The banks benefitting from the reductions must have extended a certain amount of inclusive finance loans to the real economy, said the central bank. The move released Rmb550bn into the market.  

In late February, China had already launched Rmb500bn of re-lending and re-discounting quota for commercial banks to on-lend the funds they borrow from the central bank to small businesses, which will enjoy a discounted interest rate on their loans.

Tuesday's cabinet meeting also emphasised promoting low-cost financing in the bond market for private enterprises as well as small, medium and micro-sized companies. The expectation is for net new financing in corporate bonds to increase by Rmb1tr from last year.

It is also encouraging supply chain finance, targeting small, medium and micro enterprises to raise Rmb800bn in account receivables financing in 2020.

The meeting, however, did not give more clarity on China’s plan to issue special treasury bonds, which was revealed at the Politburo meeting. Haitong Securities expected the size of the issuance to be around Rmb1tr, Morgan Stanley at more than Rmb2tr and Nomura between Rmb2tr and Rmb4tr.

By Addison Gong
01 Apr 2020