People's Bank of China Provides 70 Trillion Won to Banks to Encourage SME Loans

[Asia Economy Beijing=Special Correspondent Park Sun-mi] The People's Bank of China, the central bank of China, has decided to supply about 70 trillion won to the banking sector to provide liquidity to the real economy.

According to Chinese economic media Caixin on the 2nd, the People's Bank of China announced in the 'Measures to Strengthen Support for SME Loans' that it will use a new policy tool to purchase 40% of SME loans generated by qualified banks by injecting 400 billion yuan (about 68.7 trillion won) of funds.

The People's Bank of China stated that it will provide funding support only for unsecured loans to SMEs made between March and December this year, with a repayment maturity of at least six months. Commercial banks must repay the funds to the People's Bank of China after one year. While banks typically pay about 2.5% interest annually when using general relending programs, this policy effectively allows repayment of principal only, with no interest.

Caixin explained that this policy aims to encourage the banking sector to use 1 trillion yuan of funds for SME loans amid the economic impact of COVID-19 on China.

Experts describe the People's Bank of China's policy as quantitative easing to supply liquidity to the real economy.

Qiu Qing, Chief Economist at Beijing Zhanghai Securities, told Bloomberg, "This reflects the purpose of addressing funding support for SMEs, which play an important role in stabilizing employment," adding, "However, this policy has limited effects on supplying liquidity to banks and lowering borrowing costs. It cannot replace a comprehensive interest rate cut."

Xin Jiaofeng, an economist at Australia and New Zealand Banking Group, also said, "This program shows that supporting SMEs is the top priority for Chinese policymakers after the COVID-19 shock," and evaluated, "This is effectively the start of quantitative easing to directly supply cheap funds to the real economy."