China moves to spur bank lending to help troubled small businesses.

As the country’s economic growth slows, the central bank said lenders could reduce how much money they kept on reserve, an effort to increase lending.


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China moves to spur bank lending to help troubled small businesses.

Consumer spending has been slow to recover from the pandemic in China, and many small businesses need to borrow money at affordable rates to stay open.Credit…Gilles Sabrie for The New York Times

July 9, 2021, 8:46 a.m. ET

JINAN, China — Faced with gradually slackening economic growth and a direct order for action from China’s cabinet, China’s central bank said Friday that it was taking steps to help the country’s commercial banks lend more money.

Extra lending could help China’s small and midsize enterprises, particularly retailers. Consumer spending has been slow to recover from the pandemic in China. Many struggling smaller businesses need to be able to borrow money at affordable interest rates to stay open.

When commercial banks accept customers’ deposits, they are typically required to park a small share of the money at their country’s central bank. They are then free to lend the rest.

The People’s Bank of China, the country’s central bank, said on Friday evening that effective next Thursday, it would allow commercial banks to park a slightly smaller share of deposits. Allowing commercial banks to take back some of the money will, at least in theory, free them up to lend more.

But the People’s Bank also cautioned in its announcement that the effect might be somewhat muted, because part of any extra lending is likely to disappear quickly into the government’s coffers as the summer tax collection season starts.

China’s monetary policy has swung sharply over the past 18 months in response to the pandemic. The central bank pushed banks to lend heavily early last year as the virus raced through Wuhan and beyond, to make sure businesses did not run out of cash.

Worried that the extra money might fan inflation, the central bank later tightened policy. But with many companies struggling to pay interest on their debts, and with the economy not quite fully recovered from the pandemic, the central bank then changed policy again on Friday toward further easing.

The new rule allows practically all financial institutions to reduce the required percentage of deposits, the so-called reserve requirement ratio, by half a percentage point. The exact ratio varies with the size of the bank, but the average will be 8.9 percent after next Thursday, the central bank said.

The central bank encouraged commercial banks to lend more to smaller businesses. Lending has been growing less rapidly in the first half of this year. But there have also been some signs that lower lending might signal a wariness among borrowers to take on even more debt, as opposed to any regulatory constraint on how much the banks can lend.

The central bank said it was acting “to support the development of the real economy and promote a steady decline in overall financing costs.”

Li You contributed research.

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