The central bank will create a “targeted” version of its Medium Term Lending Facility, and take applications from banks that meet regulatory requirements and have potential to increase credit supply to smaller companies, the PBOC said in a statement late Wednesday. The funds will be at a rate of 3.15 percent, lower than current facilities which have shorter maturities.

In addition to four cuts to reserve requirements so far this year, the new funding tool signals that policy makers remain concerned about the threat to economic growth posed by a clampdown on shadow banking that has gripped hard in recent months. Even so, the PBOC is stopping short, for now, of cutting borrowing costs across the board, a move that would pressure the fragile currency.

“This is a low-profile rate cut to bolster private and smaller companies, " said Larry Hu, a Hong Kong-based economist at Macquarie Securities Ltd. "China is clearly gradually escalating the easing measures."

Shrinking Shadow Loans
Some shadow loans have moved to banks' balance sheets

In tying longer-term liquidity to banks’ performance in lending to the real economy, China is further adapting an approach taken previously by the Bank of England and the European Central Bank. China’s major lenders have long had little incentive to lend to private companies -- the majority of which are small firms -- compared with safer bets funding state-owned enterprises.

Qualifying large commercial banks, joint-stock banks and city commercial banks can apply for the funding; the central bank will decide on the amount of funds to be provided depending on the growth of their lending to small and micro-sized enterprises and private companies, the central bank said in a separate statement.

In continuing to ease policy by increments, China is moving in the opposite direction to the U.S. Federal Reserve, which is expected to enact a further quarter-point rate increase on Wednesday.

China’s large commercial lenders have lagged in increasing lending to the smaller firms this year, even amid an official campaign to shore up the private sector. The PBOC also expanded the quota through which banks can borrow to support specific sectors, known as the re-lending tool. That quota was increased by 100 billion yuan ($14.5 billion).

Economic policy makers are due to gather this week in Beijing for an annual conclave that sets the priorities for monetary and fiscal policy for the coming year. The economy slowed again in November as retail sales and industrial production weakened, creating a challenging backdrop for that meeting.

PBOC Governor Yi Gang last week may have signaled that further policy moves were in the offing, saying that the central bank would remain supportive. Economists expect such support to involve another 200 basis points of reduction to the required reserve ratio for major bank, though most don’t currently forecast a cut to the benchmark 1-year lending rate.

There are signs that credit-focused policy measures rolled out since mid-2018 are already helping to restart lending. The broadest measure of new credit exceeded estimates in November, as unofficial credit channels that the government wants to stem continued to contract.

Wednesday’s move can be seen as a “structural, targeted interest rate cut,” said Lu Zhengwei, chief economist at Industrial Bank Co. in Shanghai. Lowering the cost of the central bank’s loans to commercial lenders, rather than cutting benchmark lending rate, can avoid a leverage-ratio rebound and help stabilize market expectations on the currency, he said.

(Published by Bloomberg, December 19, 2018)