Chinese paramilitary police officers walk in formation on Tiananmen Square in Beijing, China. Picture: REUTERS
Chinese paramilitary police officers walk in formation on Tiananmen Square in Beijing, China. Picture: REUTERS

Beijing — China’s financial regulator has told banks to "significantly cut" lending rates for small firms in the third quarter in comparison with the first quarter, two people with direct knowledge of the matter told Reuters on Monday.

The move comes amid a Chinese deleveraging campaign to crack down on financial risks and economic uncertainty, triggered by a trade war with the US that economists have cautioned could slow down China’s economic growth.

The economy has felt the pinch from the multiyear crackdown on riskier lending that has driven up corporate borrowing costs, prompting China’s central bank to pump out more cash by cutting reserve requirements for the country’s lenders.

In a nonpublic notice issued by the China Banking and Insurance Regulatory Commission (CBIRC) in late June, the regulator also asked banks to increase real-time monitoring of lending rates, the two people with knowledge of it said.

The CBIRC did not immediately respond to an e-mailed request seeking comment.

Besides gradually pushing up borrowing costs for the corporate sector, Beijing’s deleveraging campaign has restricted companies from tapping alternative, murkier funding sources such as shadow banking.

China’s central bank does not disclose the lending rates for small businesses.

The weighted average lending rate for the nonfinancial corporate sector was 5.96% in March, according to the latest monetary policy report.

Private companies and small businesses, whose financing costs tend to be much higher than those for large state firms, have suffered the most in the strained liquidity conditions. Recent official surveys also show that tight funding has hit smaller manufacturers.

To ease refinancing pressure on small businesses — a pivotal part of the world’s second largest economy — China’s central bank recently cut banks’ reserve requirement ratios by 50 basis points, releasing $108bn in liquidity.

During high-level government meetings, Premier Li Keqiang has repeatedly urged that banks effectively lower financing costs, especially for small businesses and the agriculture sector.

In the June notice, Chinese banks were also told to keep asset quality and overall costs of their small business lending at a reasonable level, said the sources, who declined to be named as they were not authorised to speak to the media.

The CBIRC has asked its branches nationwide to strengthen regulatory review to examine the progress made by banks, the sources said.