HONG KONG (Reuters Breakingviews) - Washington’s trade threats are giving Beijing an excuse to slide back into state bailouts. The latest easing move from the People’s Bank of China reduces the amount of funds banks must hold in reserve, effectively releasing $108 billion into the financial system. The liquidity will buttress rattled markets, and should also bring borrowing costs down. Unfortunately, regulators want most of the funds to go towards supporting the conversion of debt owed by rickety state-owned steel and coal companies into equity. That will prop up state zombies, while private sector profit margins shrink.
The PBOC has been shrinking reserve requirement ratios for several years; the benchmark rate for the largest banks now stands at 15.5 percent, down from 21.5 percent in 2011. That makes sense. Cutting the reserve requirement ratio is one way for Beijing to deal with two key concerns: encouraging lenders to support productive investment, while also owning up to bad debts. A lower ratio means they can re-categorize long-overdue credits as non-performing, without crimping their overall ability to lend.
But this move is less deft. The PBOC has divided this cut into two parts, only the smallest of which is targeted at prompting smaller banks to lend more. The largest tranche, of $77 billion, is for the heavyweights, which regulators want to lean on for debt-to-equity swaps. Lenders convert outstanding loans into equity at friendly terms, then resell the stakes on to other investors through special purpose asset-management units. In essence, these are bailouts for struggling state-owned commodity companies like Chongqing Iron and Steel, routinely accused of product dumping overseas.
Demand for the equity has been tepid, however. The aggregate amount of swaps announced was 1 trillion yuan at the end of 2017, but only 16 percent of those had been actually executed, according to Natixis research.
The PBOC would do better to focus on supporting consumption, under pressure from trade stress and the impact of deleveraging on corporate demand. China Beige Book’s first quarter retail survey showed prices deteriorated in most sectors, while capital investment fell. It’s an odd time to waste funds propping up China’s least efficient, and most trade-irritating, companies.
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