A broad range of financing instruments have been selected by China’s monetary authority and financial regulatory bodies to help overcome the funding shortage faced by much of the nation’s private sector.
Intensive policy announcements from financial regulators since the weekend have all focused on easing the financing conditions for the private sector and improving the business environment, to ease investors’ recent concerns that the private sector may face more challenges under economic slowdown pressure.
The People’s Bank of China, the central bank, announced late on Oct 22 the use of financial tools to boost bond financing and bank lending for private companies.
The specific mechanism is that the central bank provides initial funds through re-lending to improve private companies’ credit rating, reduce credit risks and ensure their repayment. Professional financial institutions will be authorized to take specific operations via a market-oriented approach, according to a statement on the PBOC website.
A possible financial instrument, according to analysts, could be the Credit Risk Mitigation Warrant (CRMW), a complicated financial derivative instrument to hedge credit default risks. China Bond Insurance Co Ltd is one of the key professional institutions guided by the central bank to provide related financial services.
In addition, the central bank will issue 150 billion yuan ($21.63 billion) in re-lending and rediscount credits to encourage the financing of micro, small and medium-sized enterprises, especially those with liquidity constraints. It has already increased re-lending and rediscount credits by the same amount in June.
The Securities Association of China, a self-regulating organization, also announced it would promote the implementation of an aggregate asset management plan to facilitate private companies’ growth.
In the plan, 11 securities companies agreed to inject 21 billion yuan as the initial fund, which could leverage 100 billion yuan investment from banks, insurance companies, State-owned enterprises and local government financing vehicles, especially to ease the stock pledge risks of listing private companies.
“The signal (from the policy) is probably more important than the measures themselves,” said Song Yu, an economist with Beijing Gao Hua Securities Co Ltd, Goldman Sachs’ joint venture company in China.
Although the supportive measures may contribute only modestly to the overall economy, they are building momentum and changing people’s perceptions about the policy environment, he said.
This policy package appears to be in response to economic downside risks, stock market turbulence and market concerns about external uncertainties against the backdrop of the intensified global trade tensions. Financing difficulties have emerged among some private companies, along with increasing debt defaults.
The ongoing deleveraging campaign, focusing on reining in the shadow banking business, has constrained some fund-raising activities for some private companies that rely on banks’ off-balance-sheet financing. The tightened regulatory environment has led to a further reduction of market participants’ risk appetite.
Xu Zhong, director of the central bank’s research bureau, said the policies could “send positive signals and strengthen private companies’ investment confidence, to prevent risk contagion among the stock, bond and credit markets.”