A press conference of Joint Prevention and Control Mechanism of the State Council was held at 10 a.m. on Friday, April 3, 2020. At the conference, Xu Hongcai, Vice Minister of the Ministry of Finance (MOF), Liu Guoqiang, Deputy Governor of the People’s Bank of China (PBC), and Zhou Liang, Vice Chairman of the China Banking and Insurance Regulatory Commission (CBIRC) introduced the measures to increase local government special bonds and enhance support for micro, small and medium-sized enterprises (MSMEs) with inclusive finance, and took press questions. Selected transcript is as follows. (This English version only covers the speech and answers of PBC Deputy Governor Liu Guoqiang.)
Liu Guoqiang: Friends from the press, good morning. Faced with the material impacts of the COVID-19 outbreak on MSMEs, the PBC has followed the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, and resolutely implemented the decisions and arrangements made by the CPC Central Committee and the State Council, taking swift and proactive actions to cope with the new challenges posed by the epidemic, and supporting the expansion of domestic demand, the resumption of production and the protection of employment.
We have introduced a series of measures to offer targeted financial services for the purposes of epidemic containment, work and production resumption, and real economy development. First, liquidity has remained reasonably adequate. Since the financial markets’ reopening, we have supplied short-term liquidity of RMB1.7 trillion to the markets. On the basis of the cut in required reserve ratio (RRR) across the board by 0.5 percentage points at the beginning of the year, releasing over RMB800 billion, we launched a targeted RRR cut for banks to issue inclusive loans in March, releasing another RMB550 billion of long-term fund. Second, targeted support has been provided through central bank lending and central bank discounts. The PBC launched RMB300 billion worth of special central bank lending for the battle against the epidemic, over half of which was directed towards MSMEs. With interest subsidies, the interest rate costs born by MSEs are lower than 1.3 percent. In addition, we increased the quotas on central bank lending and central bank discounts by RMB500 billion, and lowered the interest rates of central bank lending for agriculture and MSEs by 0.25 percentage points, from 2.75 percent to 2.5 percent. The central bank has contributed to support work and production resumption of MSMEs in key sectors through low-cost inclusive finance funds. Third, lending rates have decreased under the central bank’s guidance. On March 30, the interest rate of reverse repos in open market operations declined again by 20 basis points, bringing a total decrease to 30 basis points since the beginning of this year. Fourth, the synergy of the financial system has been leveraged. The PBC has urged large-scale state-owned banks to step up their inclusive support for MSEs, soundly implemented the special credit support for policy banks, guided local incorporated banks to serve the local economy, and strengthened countercyclical adjustments.
So far, these measures have achieved marked outcomes. The growth rates of broad money supply (M2) and aggregate financing to the real economy (AFRE) are basically in line with and slightly higher than that of the nominal GDP. Against the backdrop of partial resumption of work and production in the real economy, the amount of new loans has reached a record high. The financing of MSMEs features increase in scale, expansion in coverage and drop in cost. Money market pivot interest rates have shifted downwards as a whole. The RMB exchange rate has remained relatively stable, and shocks from external financial risks have been effectively fended off.
It was determined at the 88th State Council Executive Meeting that inclusive financial support for MSMEs would be further enhanced. First, central bank lending and central bank discount quotas for small and medium-sized banks will be raised by RMB1 trillion. The RMB300 billion, RMB500 billion and RMB1 trillion represent a consecutive process which helps a large number and a wide range of MSMEs facing relatively high financing costs to access policy support of central bank lending and central bank discounts. Second, targeted RRR cuts for small and medium-sized banks were further put forward. With wide geographic distribution and acquaintance to local economy, small and medium-sized banks are innately inclusive. To put it simply, lacking opportunities to serve behemoths, they could only serve small enterprises instead. Therefore, they are endowed with inclusiveness. Exercising a relatively low RRR on small and medium-sized banks is an important initiative to promote financial supply-side structural reform, through which the structure of financial supply and allocation of credit funds are improved. As a result, small and medium-sized banks will be able to focus more on MSMEs, increase credit supply, reduce financing costs and serve the real economy. Third, support for bond financing has been reinforced. With the support of the PBC, financial institutions have issued RMB300 billion worth of MSE financial bonds, and the growth of net financing of corporate credit bonds, under the PBC’s guidance, has risen by RMB1 trillion over the previous year, which not only further diversifies the sources of funds for financial institutions, but also expands various low-cost financing channels for enterprises and improves financial services.
In the next step, the sound monetary policy will be practiced in a more flexible and appropriate manner. We shall hold the bottom-line thinking, properly manage the intensity, priority and pace of policies in line with the different stages of epidemic containment and economic situations, and attach greater importance to supporting the restoration of the real economy. While strengthening the aggregate and countercyclical adjustments of the monetary policy, we need to properly deal with the relationship among stabilizing growth, preventing risks and managing inflation, and ensure that the growth rates of M2 and AFRE are basically in line with and slightly higher than that of the nominal GDP. Fully taking the characteristics of MSMEs and their current constraints into account, we will effectively put existing responding measures in place to help enterprises weather the tough times. We are also going to strengthen international cooperation and guide market expectations through multiple channels. Thank you.
Journalist with Nihon Keizai Shimbun: Since last August, the loan prime rate (LPR) has declined by 26 basis points, which has narrowed banks’ spread, so some banks are calling for lowering benchmark deposit interest rate. What is your opinion on this issue?
Liu Guoqiang: Ostensibly, falling interest rates does lead to narrowed spread of banks. We will, however, take many other measures, such as offering low-cost funds and ensuring reasonably adequate liquidity in the market, so as to facilitate banks to access funds with much lower financing cost in the financial market. Meanwhile, we are also mulling over enhancing support for banks, especially for small and medium-sized ones. Benchmark deposit interest rate is the ballast of China’s interest rate system. While it may be used as a tool, its special nature requires more consideration in practice. For instance, China’s current CPI is 5.3 percent, remarkably higher than the one-year deposit interest rate, which is 1.5 percent. This has to be factored in. Besides, economic growth, internal and external equilibrium and possible greater currency depreciation pressure resulted from excessively low interest rates are also the ones that need to be taken into account. In particular, the deposit interest rate is more directly related to the general public, so any adjustment into the negative territory should involve a full assessment as well as considerations on people’s reactions. In sum, it can be used as a tool, but a more sufficient assessment is required.
Journalist with Economic Daily: With its worldwide spread, will the epidemic have a greater impact than the 2008 financial crisis? And what else will the central bank do if the Q1 economic data are below expectations? Thank you.
Liu Guoqiang: This is a very important question. Many people are concerned about how to look at the current economic situation and what should be done. Opinions vary, some of which are vastly different. My answer is that there will be a big impact on the world economy. But uncertainties remain as to how severe it will turn out to be and when the situation will improve.
The impact has been clearly felt in several ways. The first is the industrial chain. Without the supplies of raw materials, some industries and enterprises cannot produce. The second is trade. Without orders, some enterprises cannot sell their products. Both are prominent problems. The third is expectations. People’s sentiments are affected, with risk aversion on the rise and the market undergoing fluctuations. These are the three marked influences.
What will happen next? Or will the impact exceed that of the 2008 financial crisis? Not yet so far. For example, stock markets around the world have dropped by roughly 25 percent since February 24, whereas their decline in the 2008 financial crisis was about 50 percent, which is typical of a crisis. What will happen next is still hard to predict. The International Monetary Fund lately projected negative global growth for 2020, and a recession that could be worse than the downturn in the 2008 financial crisis. This was a relatively clear message, but they still used the wording “could be worse.” Despite the severity of the impact, it should be noted that countries around the world have introduced strong countermeasures. Moreover, they have stepped up epidemic prevention and control efforts and strengthened international cooperation. Therefore, what things will be like in the coming days should be closely watched.
How will China be impacted? And how do we view the impact? Judging by normal standards rather than in the context of the epidemic, the Q1 data, I think, will surely be discouraging. Nevertheless, in terms of marginal change, March is expected to see a notable upturn compared with February. That is why I think the impact of the epidemic on China won’t last long. The Chinese economy will continue to show strong resilience. And we have plenty of tools and ample room for policies to stabilize economic growth.
What will be done next? As far as the central bank is concerned, greater importance will be attached to the flexibility and appropriateness of a sound monetary policy, and higher priority will be given to supporting the recovery of the real economy. To be specific, first, the intensity, priority and pace of policy conduct will be properly managed at different stages. “Different stages” refer to the preceding stage of epidemic prevention and control, and then the gradual resumption of work and production followed by the current stage of resuming work and production all through the industrial chain to activate the entire economy. Therefore, work will be done based on the conditions at different stages to keep liquidity reasonably adequate and fully satisfy market demand. In other words, we won’t allow a liquidity crunch to ever occur in the market. Of course, we don’t want to see currency devaluation, either. Our aim is to keep liquidity reasonably adequate and meet market demand so that the growth rates of M2 and AFRE are basically in line with and slightly higher than that of the nominal GDP. Second, we will continue to make proper use of the RMB300 billion of special central bank lending and the RMB500 billion of central bank lending and central bank discounts, both of which have already been launched and have not been used up yet. Certainly we should use the funds in a targeted manner. Third, the newly increased RMB1 trillion of central bank lending and central bank discounts for inclusive finance will be effectively put in place. With a wider coverage than the preceding RMB500 billion, this new policy will be implemented at a faster pace so that it will link up seamlessly with the prior policy. Fourth, targeted RRR cuts will be carried out effectively so that the guiding role of the reserve instrument as a positive incentive will be brought into play. Fifth, efforts will be made to push ahead with the LPR reform, enhance the self-regulatory mechanism for interest rate pricing, and guide banks to sacrifice part of their profits to support the real economy, so as to bring down significantly the overall financing costs of enterprises. Sixth, we will strengthen international cooperation and foster a favorable international environment so as to fight the pandemic and stabilize the economy together with the international community. Also, we will further increase communications with the market and the media to convey our policy intent in a timely, public manner. Thank you.
Journalist with CNBC: My first question is about the RMB300 billion and RMB500 billion worth of loans you mentioned just now. How much of the amounts is in place now? When will the additional RMB1 trillion of central bank lending be released?
Liu Guoqiang: I can share some data with you. Let’s start with the RMB300 billion worth of special central bank lending, which is primarily spent on key enterprises securing supplies for the fight against the epidemic, such as producing medical supplies. As of March 30, nine banks operating nationwide and 10 provincial- and municipal-level locally incorporated banks had issued a total of RMB228.9 billion of loans at preferential rates to 5,881 key enterprises, each of which received no more than RMB40 million on average with an average weighted rate of 2.51 percent. The real lending rate is around 1.26 percent with a 50 percent interest subsidy granted by the MOF. The RMB500 billion worth of central bank lending and central bank discounts primarily support the orderly resumption of work and production. As of March 30, locally incorporated banks had issued a total of RMB276.8 billion loans at preferential rates including discounts to 351,400 enterprises (including rural households). To be more specific, agriculture-related loans amounted to RMB55.2 billion with an average weighted rate of 4.38 percent; inclusive loans issued to MSEs totaled RMB155.6 billion with an average weighted rate of 4.41 percent; and discounts reached RMB66.1 billion with an average weighted rate of 3.08 percent. None of these rates are higher than 4.55 percent, a ceiling set by the State Council.
As to the additional RMB1 trillion of central bank lending and central bank discount, it was determined at the 88th State Council Executive Meeting a few days ago. The main purpose was to align this policy with the real economy in recovery and with the preceding policies worth RMB300 billion and RMB500 billion respectively to avoid any policy vacuum. The PBC introduces the tools of central bank lending and central bank discounts to provide small and medium-sized banks with low-cost financing support. Like previous arrangements, the interest rate of this additional central bank lending and central bank discounts is as low as 2.5 percent, so as to reduce the debt cost of these banks and accordingly expand room for the moderate lowering of their lending rates in favor of MSMEs. For this new policy, we will request small and medium-sized banks to lend loans to MSMEs at preferential rates, which are to be determined at their discretion. The ceiling rate for the RMB500 billion worth of central bank lending is 4.55 percent. However, we didn’t set any limits this time. Instead, we will take certain measures, such as incentive-based evaluation to encourage loan extension to MSMEs at lower rates. Even though this policy does not involve any fiscal interest subsidies, the effect of the preceding RMB500 billion central bank lending and central bank discounts shows that local governments have come up with subsidies in the absence of central government interest subsidies. On that account, we expect local governments to provide interest subsidies this time as well, so that enterprises can actually benefit from more preferential rates. As to when the policy will be carried out, we have started planning and will launch it as soon as the RMB500 billion is used up. The specifics of the policy will come out soon. Thank you.
Journalist with Bloomberg News: Good morning, I’m from Bloomberg News. I have a question for Deputy Governor Liu about the stability of the banking system that you mentioned earlier. According to the China Financial Stability Report released by the PBC in 2019, under the scenario of the GDP growth falling below 4.1 percent, 17 large banks failed to pass the stress test and more than 180 large banks failed to pass the liquidity test. This year’s projection of GDP growth is 3.1 percent, much lower than the worst scenario of 4.1 percent projected last year. So what do you think of banks’ performance? Will there be another stress test? Thank you.
Liu Guoqiang: Based on macroeconometric models, historical situations and expert judgement, the scenario in the stress test of the banking sector in 2019 was primarily hypothetical. The stress scenario was “extreme but possible,” with small likelihood to materialize. It was a hypothetical condition. Since the outbreak of the epidemic, we have been closely monitoring risks in the banking system and systematically assessing the impact of the epidemic on the banking sector. Stress tests have been conducted. Relevant results will be released to the public in the updated edition of the financial stability report in a timely manner.
In the short run, risks will rise inevitably as the epidemic has exerted severe short-term impact on the economy and some sectors have been heavily hit. Also, the credit assets of banks will surely face some downward pressure. Nevertheless, China’s banking sector on the whole has relatively strong loss-absorbing capacity, and is well prepared to counter risks. At end-2019, the non-performing loan (NPL) ratio of commercial banks in China stood at 1.86 percent, far below the regulatory line of 5 percent. The provision coverage ratio was 186.08 percent, and the outstanding amounts of loan loss provisions totaled RMB4.5 trillion, enough to cushion the rise in the NPL ratio. In 2019, the banking sector resolved RMB2.3 trillion of non-performing assets, with banks managing their asset quality by various means. Although some banks are having a hard time, they are able to pull through.
