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PBoC outlines plan on how FIs can sacrifice RMB 1.5 trillion of profits to bolster real economy

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Yi Gang, Governor of the People’s Bank of China (PBoC), provided a framework last Thursday at the Lujiazui Forum on how financial institutions could achieve the letting go of RMB 1.5 trillion of profits in order to support the country’s COVID-19 disrupted economy.

Yi’s speech follows Premier Li Keqiang’s suggestion in May, in his annual work report for the National People’s Congress, that financial institutions could forgo a total of RMB 1.5 trillion in profits in 2020 to support enterprises in different industries by reducing lending costs, especially for small and micro-businesses. Sources from Bloomberg have also indicated that regulators have requested banks to keep profit growth under 10% for 2020.

Yi highlighted three areas where the financial industry could release profits in order to fuel the real economy of the country. These areas included lowering banking interest rates, reducing banking service fees, and channeling the liquidity released by the government’s monetary policy tools to corporate borrowers.

Indeed, the PBoC has lowered the reserve requirement ratio (RRR) three times to 9.4% since the beginning of 2020, releasing RMB 1.75 trillion into the banking system.

Yi also mentioned that, in view of the pandemic, the volume of bad loans among banks would increase and that the regulator is accelerating the efficiency of processing non-performing assets.

“Processing non-performing assets is an important measure for banks to support the sustainability of the real economy. It is also an important contribution by the financial sector to bear the costs of the real economy,” he said.

The regulator highlighted the importance of taking a phased approach to introducing financial support policies, and ensuring that the stimulus is of appropriate scale and will be withdrawn on schedule.

According to a local Chinese publication Yicai, while the RMB 1.5 trillion sacrifice targets the entire financial sector, major national commercial banks are likely to bear the brunt of the target — as much as RMB 1-1.2 trillion — as they comprise a large portion of the sector and are more profitable than small-to-mid size local banks.

Other industry sources commented that while the measures will strain the banking businesses, the survival of the real economy would benefit the development of the sector going forward.

With reports stating that the cost-income ratio of Mainland Chinese commercial banks is at an average of around 30% — well below that of their international cohorts — some industry participants have argued that there is room for banks to share profits, through more relaxed lending to corporates, in difficult times.

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