Soldiers no longer send messages by coded semaphore. The practice lives on in the pronouncements of central bankers. In China, they have shown how much they care about recurrent western worries of a bank debt meltdown: they don’t. The central bank may cut minimum reserve requirements for some banks after five previous cuts, to support smaller businesses as the economy slows.

This sounded reckless on a day when the National Audit Office warned that some banks in Henan have non-performing loans equal to two-fifths of the total. The truth lurks between this figure and improbably low NPLs of 1.89 per cent for the bank sector, as quoted in official data.

That number would be low even after years of forced deleveraging. Higher corporate borrowing costs and slowing growth have been tough on smaller companies. The government pushed for banks to step in with a mandate to increase loans to smaller companies by a third.

SMEs contribute almost 90 per cent of China’s employment and more than half of its economic growth. While fast-growing, to lenders they are riskier. Default rates are steep.

The latest measures will add to China’s mounting debt, but many stand to benefit. Even with Rmb1.75tn ($258bn) worth of distressed loans hitting the market last year, large state-owned banks were not too flustered. They have comfortably shouldered higher loan loss provisions. The state swoops in intermittently to shift NPLs to private investors and funds. 

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The position of regional banks is more precarious, both financially and politically. In some provinces, more than half the banks have NPLs above the 5 per cent NPL warning level set by authorities. 

In the longer term, tax cuts and direct financing options including easier IPOs, should help SMEs avoid liquidity squeezes. Investors in China shares, excluding large bank stocks, should get a boost from short-term easing moves.

The coded message of higher debts backed by risky SMEs is hardly reassuring. Once again, bullish western capitalists need faith in the wisdom of Chinese communists.

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