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China Pledges to Ease Credit Crisis

The People’s Bank of China has taken several steps this week to free up bank credit, easing fears of manufacturing companies.

 

BEIJING — China’s central bank is at last pledging to ease the country’s credit crunch that set global financial markets on edge last week and sparked renewed fears of an economic meltdown in the world’s second-largest economy.

For China’s manufacturing sector, the credit crunch is serious business. The People’s Bank of China has taken several steps this week to free up bank credit, easing fears of manufacturing companies that rely on cash flow from credit to stay afloat. The bank said Tuesday that it would take measures to restrain and hold interest rates within a reasonable range, a welcome sign after a week of nervous anticipation over whether the bank would allow China’s overleveraged economist structure to suffer a hard landing.

The bank’s lack of action at the start is believed to be an initial test of potential economic reforms that may be put forward by the new government that took over in March. Analysts and manufacturing sector insiders said last week’s panic was a clear signal that China’s new leadership intends to let market forces rule more and curb the overlending that has led to underlying economic problems.

 

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Lin Linghui, a manager for the Taiwan-owned Unitex (Shanghai) Material Corp., said the credit crunch was not causing major problems for his textile factory, in part because his company planned in advance and has six months’ worth of raw materials on hand. Immediate credit is not a major concern. However, Lin said, difficulty in obtaining credit will have a big impact on smaller factories that rely heavily on credit for each round of production materials as they fill orders.

“I don’t think this round of credit crunch will exert big impact,” Li said. “Maybe some small enterprises will shut down.”

Others said a bleak export market outlook continues to be their primary concern, even more than the credit problem. Several factory managers said orders remain slowed and domestic demand has not picked up the slack left by a lack of export-driven production in recent years. Obtaining credit is a secondary concern when there are no orders to fill.

“We are trying to get more orders and focus more on the domestic market,” said Wang Liguo, a manager at the Ningbo Flyer Textile Technology Co. “It’s a gloomy situation for exports now.”

Several analysts said the central bank’s new willingness to step in and force rates lower to increase lending will have a positive effect. On June 18, China’s prime short-term lending rates soared to 18 percent, a historic high. In years past, the People’s Bank of China would have intervened sooner, calming interest rates by imposing curbs. Now that the bank has stepped, rates have dropped dramatically.

But analysts said this is just the start of what will be a correction in economic policies that had China headed down a dangerous path.

“The Chinese government did this so as to give banks some pressure,” said economist Yi Xianrong from Chinese Academy of Social Sciences. “In the next six to 12 months, credit expansion will slow down and financial risks will be reduced.”

Yi said he sees the central bank’s slow action as a signal that necessary financial reform is under way, something difficult to gauge in a country when decisions are made in secret and seldom announced.

“This is an adjustment to the financial system,” he added. “Capital will gradually flow into the real economy, then small and medium-sized textile companies will find it easier to finance in the future. Apart from this, the credit crunch will open a door to multiple ways of financing. Small textile companies might seek other ways of financing instead of merely rely on bank loans. “