China’s Central Bank Buys Bank Loans, Urges Banks To Lend 1 Trillion To Small Firms

People's Bank of China front view

Amidst the continuous threat of the coronavirus to people’s lives and the nation’s economy, China started an initiative to help small businesses. China’s central bank backed the small firms by purchasing loans they made from local lenders.

China, trough the initiative, urges its banks to lend up to 1 trillion yuan to small firms as they struggle to recover from the coronavirus pandemic.

PBOC buys loans on a quarterly basis

The People’s Bank of China, the Asian economic giant’s central bank, announced the plan to spend 400 billion yuan to purchase loans from qualified banks, including city commercial banks, rural commercial banks, rural cooperatives, and private banks.

The central bank will purchase the loans from qualified banks, given that they will repurchase the loans after a year and agree that the central bank will not bear the risks of the loans that don’t go out as planned. The initiative aims to encourage lending to small businesses.

Wen Bin, Minsheng Bank’s senior economist, said that the move is expected to raise the small banks’ ability to support the real economy, which includes the small banks. The central bank’s move will also lower interest rates on loans made by the small firms.

The PBOC advised the financial institutions to divert their attention from lending to property firms and government-backed financing that provides funds to small businesses’ infrastructure projects.

Just like the rest of the world, Asia’s strongest economy shrank because of the pandemic. In the first quarter, the country’s economy declined by 6/7 percent compared to last year.

Experts believe that China’s economy will return to its pre-coronavirus levels after several months.

The central banks also announced plans to release 40 billion yuan, relending funds to extend loan payments for small forms. A special purpose vehicle (SPV) will pave the way for interest rate swaps with the banks to further help small businesses.

China plans to stabilize the economy in 2021

In its aim of stabilizing the economy back to its pre-coronavirus status, the country initiated leverages in its financial system. Experts believe the peak of the leverage is in 2020, following the significant decline of the GDP due to coronavirus.

China is focused on stabilizing its financial sector by boosting funding on weak financial institutions. However, experts see additional challenges as the novel coronavirus continuous to threaten around the globe.

Experts also warn about the impact of the prolonged China-US trade conflict. Small businesses are directly affected by the tariffs slapped by the two nations on each other. Some firms rely on export and import fears the on-going conflict.

US and China have been at a trade war since last year. The US accuses China of stealing technology theft. The Western superpower also claimed that the Asian economic giant practices unfair trade with its partners.

The conflict between the two nations resurfaced during the coronavirus pandemic when the US accused China of covering up its mistakes in containing the deadly virus during its early spread. China denies all allegations and encourages experts to trace the origins of the deadly pathogen.

Relevant news