By Chong Koh Ping
China is dabbling with Western-style unconventional monetary policy, as it seeks to shore up small businesses and the labor market without fueling market bubbles.
China's central bank has allocated 400 billion yuan ($56.1 billion) to buy slices of unsecured loans made by regional lenders to small and micro enterprises.
The move, unveiled late Monday by the People's Bank of China, prompted economists to draw comparisons with efforts like the Federal Reserve's Main Street Lending program. Beneficiaries must promise not to lay off workers, much as the Fed encourages borrowers to retain employees.
The People's Bank of China will buy 40% stakes in loans with maturities of at least six months, made between March and year-end. Qualifying banks must lower lending rates for small businesses and buy back the loans after a year. The central bank won't bear the losses if loans turn sour.
The headline amount is comparatively small, given new bank lending in China for April alone was 1.7 trillion yuan. However, Ding Shuang, an economist at Standard Chartered, said the program was "significant relative to the total amount of loans made to small and micro enterprises. It will go a long way to help them," he said.
Iris Pang, chief economist for Greater China at ING Bank NV in Hong Kong, said the policy was innovative since it frees up banks' capital, thereby lowering borrowing costs, but avoids moral-hazard problems since banks still had the responsibility to lend carefully.
The new program comes after China's leaders scrapped their growth target for 2020 and said stabilizing the labor market was this year's top priority.
Banks lent more in the first four months of the year as the People's Bank pumped funds into the financial system and lowered benchmark interest rates. But while these less-targeted monetary policy moves help to cut borrowing costs, they also risk stoking property bubbles and price inflation.
Others sounded a note of caution. Xing Zhaopeng, an economist with ANZ in Shanghai, said the new move showed the central bank was taking note of the "crisis mode" that peers abroad had adopted. But he said in practice it was unlikely to be effective. "Commercial banks have to provide another 60% funds by themselves. It is not profitable as well due to the high non-performing-loan rate of unsecured loans," he said.
In a note to clients, economists at Nomura said: "By limiting the liability of government and putting the onus on banks (especially small banks) to support businesses, these measures may end up increasing financial risks in the near future."
The new program follows 2018's targeted medium-term lending facility, through which lenders borrow from the central bank to extend loans to small private firms.
Alicia García Herrero, chief economist for Asia Pacific at investment bank Natixis, said the new initiative was an experiment, and questioned if it would only last a year, especially if the economy was still recovering. "If successful, the maturity might be extended in a year's time. It seems clear that banks need more space in their balance sheet," she said.
In addition, on Monday the central bank also detailed other measures, including a program that would help lenders extend deadlines for an expected 3.7 trillion yuan in existing loans to small firms.