China Compels Banks to Lend to Small Business, Bank Stocks Tank

Reuters: China unveils more funding support for private firms

“The next step is to increase support for private and small enterprises, so that state-owned enterprises, private enterprises and other enterprises will be treated equally,” state radio quoted the cabinet saying, at a regular meeting.

China’s major commercial banks should lower their average lending rate in the fourth quarter by 1 percentage point for small firms from the first quarter, it was quoted as saying.

China will crack down on banks’ abrupt withdrawal of loans from small firms, which will be encouraged to tap bond and equity financing, state radio said.

Loans for small firms with a credit line of 10 million yuan ($1.44 million) or less will be included in collateral for the central bank’s medium-term lending facility (MLF), it said. Previously, the upper limit was 5 million yuan.

The government is forcing large state-owned banks to bear the cost of this program and shares fell yesterday, some as much as 4 percent. Leaving aside the forced interest rate cut (assuming banks follow through), banks haven't been lending to smaller companies because they fear the risk. Thus while it is a good step forward in one sense, it is another example of heavy handed central planners dealing with an economy distorted by their own policies.