China’s Central Bank Turns to Niche Policy Tool to Boost Growth

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China’s central bank is increasingly making use of one of its lesser known monetary policy tools to support the economy, a move that analysts say suggests less need for broad policy action like interest rate cuts. 

The People’s Bank of China is turning to its relending program, providing loans to commercial banks for lending to customers. The funds are usually targeted for specific uses by the central bank, such as loans to farmers, small businesses and projects that help alleviate poverty, or pandemic relief. The loans have a lower interest rate than the medium-term lending facility funds offered by the PBOC, and are usually accessible to more banks. 

China’s Central Bank Turns to Niche Policy Tool to Boost Growth

The PBOC began ramping up its use of the facility during the pandemic last year and recently announced a further 300 billion yuan ($46.5 billion) of funding to banks. Officials on Tuesday pledged to support key areas of the economy, including small businesses, green development and innovative sectors, and will use the relending program to guide banks to lend to more small companies. 

“Relending is a more targeted tool with greater accessibility and lower cost, and the heavy use of such targeted tools can help solve the structural problems in the economy and financial sector,” said Wang Yifeng, chief banking analyst at Everbright Securities Co. Ltd.  “The size of the relending program is set to expand.”

The use of the relending tool fits with China’s shift to a cross-cyclical policy approach, a strategy that analysts say implies more targeted and moderate action. 

Economists have been debating the PBOC’s next steps since it surprised financial markets with a broad RRR cut in July. Many predict further reductions in some banks’ reserve ratios, while some are even calling for interest rate cuts. 

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The PBOC’s emphasis on structural tools like relending and comments from officials that the market won’t have a big liquidity gap in coming months mean there’s a slimmer chance of an RRR cut, said Lu Ting, chief China economist at Nomura Holdings Inc. He now sees a 50% probability of a targeted RRR cut through the end of October, down from 70% previously. 

Citigroup Inc. also sees the use of more targeted tools for small businesses, with economists led by Liu Li-Gang saying in a report Wednesday that “structural credit support will be preferred to outright policy rate or RRR adjustments in the remainder of the year.”

Use of the relending quotas spiked last year in response to the pandemic. The tool gained favor in recent years because it helps credit reach the areas that are usually neglected by banks due to higher risks and a lack of credit records. 

China’s Central Bank Turns to Niche Policy Tool to Boost Growth

Like the Bank of Japan’s loan support programs or the European Central Bank’s targeted longer-term refinancing operations, it aims to get cheap money to companies in the real economy. This enhances the structure of credit, something the PBOC is keen on as it tries to maintain steady growth and simultaneously contain overall debt levels. 

Relending funds deployed since the beginning of last year have had a greater effect on increasing base money supply than what a 50-basis point cut in the RRR would have had, according to Wang. 

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