BEIJING — China will cut re-lending interest rates for small and micro enterprises by 0.5 percentage point as part of a broader policy package to ease the financial strain on small firms, a central bank document said on June 25.
The re-lending and rediscount quotas for small companies, as well as sectors concerning rural areas, will be increased by a total of 150 billion yuan ($23.11 billion), according to guidelines for increasing financial support for small and micro firms, released on the website of the People’s Bank of China (PBOC).
Better mechanisms will be in place to support the issuance of financial bonds by small companies, while banking financial institutions will be encouraged to issue securities backed by small enterprise loans. These measures are expected to provide credit of more than 100 billion yuan, according to the guidelines.
Loans for small firms with a credit line of 5 million yuan or less will be included in the scope of collateral for the central bank’s medium-term lending facility operation.
Small firms will be given more weight in the central bank’s macro-prudential assessment framework, according to the guidelines.
From September this year until the end of 2020, interest income for credit up to 5 million yuan, compared with previous 1 million yuan, for qualified small firms as well as individual businesses will be exempt from value-added tax.
China will also support the development of venture capital and angel investments to provide more financing channels for small firms, according to the guidelines.
The measures followed a central bank statement on June 24, which said it would cut some banks’ reserve requirement ratios by 50 basis points on July 5, to support qualified debt-to-equity swap programs and help small business financing.
While China’s small and micro businesses play an increasingly important role in the economy, they often find it difficult to access funds at a favorable rate compared with large State-owned enterprises.
Central Bank governor Yi Gang said at a recent forum that small and micro companies contribute to more than 60 percent of China’s GDP, 80 percent of jobs and 50 percent of the country’s tax revenue.
According to Dong Ximiao, senior researcher at Renmin University’s Chongyang Institute for Financial Studies, said while more credit support should be given to small companies, authorities should also phase out financial support for “zombie companies” so that resources can be better allocated.