China's central bank introduced two new monetary policy instruments this month to directly channel funds into the real economy, another sign that the country's monetary policy will not slide into quantitative easing.

The People's Bank of China (PBOC) said that, starting this week, it would use 400-billion-yuan (about $56.37 billion) of a special re-lending quota to purchase 40% of inclusive loans to small and micro businesses, issued by local banks from March 1 to Dec. 31.

Another policy instrument that the PBOC introduced allows small and micro businesses to apply for deferring their inclusive loan repayments, maturing by end-2020 to March 31, 2021, with penalty payment exempted.

Both policy instruments are aimed at helping small and micro enterprises maintain cash flow, gain easier access to loans, and lower the financing cost, the central bank said. It added that these tools are more market-oriented, inclusive and direct, compared to previous policies.

The PBOC's move came just days after Chinese Premier Li Keqiang emphasized that China's measures of a sizable scale are designed to provide vital relief to businesses and to revitalize the market.

China's previous measures to recover the economy in the face of challenges brought on by the novel coronavirus pandemic were seen by some as below expectations.

In response to such viewpoints, Li told a press conference after the conclusion of the annual national legislative session, that the government will not flush China's economy with liquidity.

China will ensure that measures taken are well-focused and effective, and the prescription is precise, said Li.

The central bank's innovative monetary tools are an example of how China is striving to make small and micro businesses -- an important part of the real economy -- truly benefit from government policies, according to market analysis.

Direct purchase of inclusive loans will lower the debt costs of banks and help with replenishing liquidity, said Li Qilin, chief economist of Yuekai Securities, adding that small firms can then get more credit support.

According to the PBOC, the 400-billion-yuan funds will be offered to local banks via an intermediary special-purpose vehicle, which won't charge interest for banks, making it effectively interest-free.

Local banks will be encouraged to issue new inclusive small and micro credit loans of nearly 1 trillion yuan, compared to over 300 billion yuan issued last year, the central bank estimated.

By offering local banks incentives equal to 1% of the principal to be extended, the central bank said it expected to provide a total of 40 billion yuan, at most, to support about 3.7 trillion yuan in extended loans.

Other enterprises with special difficulties, such as foreign trade companies, could discuss possible loan extension timelines with their banks, the PBOC has said.

Pan Gongsheng, vice governor of the PBOC, said the two new instruments are short-term policies created at a special time, and are different from quantitative easing in nature and scale.

Compared with some developed economies, China still has space for normal monetary policy to support the economy, Pan said. 

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