Financial institutions to sacrifice profits

Cabinet says move will bring down borrowing costs for small businesses

The State Council has scaled up financial support to businesses with measures to push financial institutions to sacrifice 1.5 trillion yuan ($212.1 billion) in profits this year to bring down borrowing costs, a move analysts said will help more small firms survive the COVID-19 pandemic.

The Cabinet said after its executive meeting on Wednesday that enabling financial institutions to concede profits is a key measure to protect market players and stabilize the country's economic fundamentals.

It pledged to introduce measures to bring down loan and bond rates, make more loans available at concessional rates, defer loan repayments for smaller businesses, support the issuance of no-collateral loans to small and micro-sized companies, and cut fees charged by banks.

The government will keep liquidity ample by cutting the required reserve ratio, the amount of money banks have to set aside in reserve, and using its re-lending policy, which allows banks to borrow from the central bank, in an effort to solve businesses' financing difficulties, the Cabinet said in a statement.

It added that the goal this year is for new loans and aggregate financing to expand more than last year.

Premier Li Keqiang underscored at the meeting that financial institutions must share weal and woe with businesses in the face of an economic downturn.

"If businesses in the manufacturing and service sectors cannot survive the pandemic, banks will also see a sharp decline in their number of clients. How can they pay interest on deposits and gain profits if this happens?" he said.

Li called on the financial sector to adopt concrete steps to cut financing costs as profit margins for smaller businesses and large enterprises shrink.

He stressed that the performance of the aid package will ultimately be judged by whether the financing costs of businesses have been lowered and if loans have been made more easily available to smaller firms.

"We need to hear the voice from not only the financial sector but also third parties, especially market players," he said.

Wednesday's meeting highlighted the need to ensure the newly increased funds can be funneled to the manufacturing and service sectors, and especially smaller companies.

The capital funds of small and medium-sized banks will be replenished as appropriate, the Cabinet said, adding that banks must improve their internal evaluation and incentive mechanisms, and raise the weight given to inclusive finance in performance evaluations.

The Cabinet also pledged to adopt effective measures to deal with nonperforming loans, saying that financial institutions must refrain from imposing unwarranted extra conditions on loan extensions.

Analysts with Haitong Securities said in a research note on Thursday that pushing the financial sector to sacrifice profits is an inevitable choice for the government to help smaller business survive a difficult period given the limited room for further monetary easing.

The People's Bank of China, the central bank, has cut the required reserved ratio three times this year, releasing 1.75 trillion yuan in liquidity to fully support the economy.

Yan Xiang, a researcher with Guosen Securities, said the Cabinet meeting conveyed a message on monetary easing that is intended to further cut the financing cost of all businesses.

He estimated that banks will need to lower their loan interest rates by 1 percentage point this year to meet the target of 1.5 trillion yuan in sacrificed profits.

The move is also expected to improve the net profits of listed companies in nonfinancial sectors by 125 billion yuan, he said.

Liu Ying, a researcher with the Chongyang Institute for Financial Studies at Renmin University of China, said banks must employ multipronged tools such as big data to bolster inclusive finance support to small and medium-sized enterprises.

"It is even more important for banks to use modern financial technologies to support businesses under the impact of the pandemic," she said.

Liu added that a stronger capital market must be developed to provide more direct financial support to businesses.