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China asks banks to up lending, relief to small business despite rising defaults

The Chinese government wants large commercial banks in the country to increase lending to small businesses by more than 40% in 2020 from a year earlier, as part of the nation's efforts to help support borrowers with weak credit profiles during the pandemic-induced economic slowdown.

In a policy address at the annual session of the National People's Congress on May 22, Chinese Premier Li Keqiang added that banks can now let small businesses pay only the interest on loans until end-March 2021, according to a transcript in Chinese posted by Xinhua News Agency.

Li also encouraged corporations to turn to the bond market for funding, a move that could enable more bank lending to small businesses and rural borrowers with limited funding channels.

In 2019, three of the nation's four largest commercial banks by assets reported more than 40% growth year over year in lending to small businesses. According to their annual reports, China Construction Bank Corp.'s and Agricultural Bank of China Ltd.'s so-called inclusive finance loans both rose 58% in 2019 from a year earlier, while Industrial & Commercial Bank of China Ltd. posted 52% growth. Meanwhile, Bank of China Ltd. extended 38% more loans to small businesses in 2019.

Many other banks, mainly smaller institutions, remain reluctant to heed the government's call to lend even more aggressively to small businesses at a time when the industry's nonperforming loan ratios are rising.

In the first quarter, medium-sized and locally focused banks reported an accelerating increase in the number of borrowers failing to repay loans on schedule as the economy contracted, according to the China Banking and Insurance Regulatory Commission. The average nonperforming loan ratio of all Chinese commercial banks rose to 1.91% as of March-end from 1.80% a year earlier.

At the same address, Li said Beijing plans to "substantially" reduce the "negative list," requiring foreign investments to seek the government's preapproval, although he did not provide further detail.

In mid-2019, China shortened the negative list by easing restrictions on foreign ownership in sectors such as oil and gas exploration, gas and heating grids.

Li added that local governments plan to issue bonds totaling 3.75 trillion yuan in 2020, during which time the central government will aim to subscribe to 600 billion yuan. The target amount is 1.6 trillion yuan more than in 2019, he said.

The funds will be used to finance projects for infrastructure, new-generation telecommunications, 5G networks, electric cars and battery-charging stations for such vehicles, he added.

As of May 21, US$1 was equivalent to 7.12 Chinese yuan.