China supports firms with targeted financing policies
Financial war against COVID-19 organized, steadily progressing
Published: Mar 22, 2020 06:27 PM

Chinese officials at a press briefing of the State Council Information Office in Beijing on Sunday  Photo: Li Xuanmin/GT

Unlike a flood-style stimulus that US and some European countries have taken to mute the impact of the coronavirus pandemic, China's stimulus remains measured and incrementally progressing.

The approach has largely helped stabilize the domestic capital market and shield it from outside turmoil, observers and officials said. 

They urged Chinese authorities to prepare for another blow as the pandemic is spreading quickly overseas, casting a shadow on China's foreign trade prospects in the coming months. 

As part of a financial package to support companies fighting COVID-19, China has set up a 300 billion yuan ($42.3 billion) special loan scheme via its re-lending program to help businesses, including those making essential medical equipment, to ensure production. On top of that, it has also increased re-lending and re-discount quotas by 500 billion yuan to help small businesses weather the crisis. 

To date, 200 billion yuan out of the 300 billion yuan of loans with favorable rates has been allocated to 5,000 companies, at a low financing cost of 1.27 percent, Chen Yulu, vice governor of the People's Bank of China, the country's central bank, told reporters in Beijing on Sunday. 

As for the 500 billion yuan quota, 130 billion yuan has been issued to small- and medium-sized enterprises (SMEs) to help them survive the virus assault, Chen said. 

"China will not resort to a flood-style stimulus such as reducing interest rates and expanding quantitative easing to flood the monetary market. China's monetary policies prioritize on targeted support. And, policymakers are well prepared to provide ammunition for a potential second blow from any external financial market crash," Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, told the Global Times on Sunday. 

On the one hand, China scaled up lending to SMEs - those who were more vulnerable to a strained capital chain - and cut their financing costs. On the other hand, it cut the reserve requirement ratio (RRR) by 50-100 basis points for banks in March, releasing 550 billion yuan to the market, Dong said.  The RRR for some small banks now has dropped to as low as 6 percent, an industry insider who spoke on condition of anonymity, told the Global Times on Sunday. 

He said that there is plenty of leeway for Chinese regulators to further reduce the ratio to a range of 2 to 3 percent, a common standard among major international giant lenders. 

As a result of the policy toolkits, China's A-share market posted better performances than the US stock market last week. The Shanghai Composite Index dropped 4.91 percent through the week ending Friday. By contrast, the Dow Jones slumped 17.30 percent last week, and the S&P 500 plunged 14.98 percent. Over the past 10 days, the key circuit breaker was triggered on the US stock market four times.

"China's A-share market is relatively stable and has shown strong resilience despite drastic fluctuations in overseas markets amid the COVID-19 outbreak," Li Chao, vice chairman of the China Securities Regulatory Commission (CSRC), said. 

Li stressed that temporary international financial fluctuations will not change the upward prospects of China's capital market.

About 20 billion yuan of foreign capital flowed out of A-share market since the beginning of 2020, Li said. "Foreign capital now accounts for 4 percent of the liquidity in Chinese stock market. The outflow has caused a certain impact, but it is not a disruptive blow," Li noted.

Chen, from the central bank, said  it is too early to say that a global financial crisis is arriving. But as the fast-moving COVID-19 pandemic is shattering the world economy and global trade, Chinese analysts warned of a possible huge retreat of foreign capital from the A-share market, in which they said the "national team" (state-backed institutional investors) should intervene if such a scenario occurs.

Chen said at the press briefing that the main goal of China's monetary policy this year is to curb inflation, contain the dual risk of economic downward pressure and a credit crunch, as well as stabilize economic growth.