Corona Credit Crunch for many Chinese businesses

With millions of people in self-imposed quarantine across China and severe travel restrictions, small and medium sized businesses could be on the verge of collapse.

Since the outbreak of the deadly coronavirus in January, businesses were forced to shut their doors, and even since many have reopened in the last two weeks, demand has been significantly dampened. A walk around a shopping mall or down what would usually be a busy shopping street is vastly different in these testing times.

The issue that many firms are facing is that they are simply running out of cash. With fixed costs remaining the same, firms are still having to pay their rent and other monthly bills. Whilst making a loss, firms have to use savings in order to pay the bills, and soon those pots will also run dry.

The Chinese government is exploring emergency measures to free up credit for small and medium sized firms, allowing them to borrow from commercial banks and use this money to keep their businesses running until consumption patterns return to normality.

One way in which the government can do this is by relaxing restrictions on the cash holdings which commercial banks must have in reserve. The People’s Bank of China, who is responsible for making monetary policy decisions in the country, will look to quickly reduce the reserve requirement ratio (RRR) so that more credit will be available.

Whilst this measure will reduce the financial burden for small and medium sized business in the short-run and save thousands from bankruptcy, the long-run implications are still completely unknown with the coronavirus still spreading and consumers likely to remain in their homes for many more weeks to come.