China's Debt_ China Said to Consider PBOC Lending Tool to Help Local Debt

BloombergBusiness

China Said to Consider PBOC Lending Tool to Help Local Debt


Photo: PBOC Governor Zhou Xiaochuan has overseen a variety of innovations at the central bank to channel liquidity where policy makers want. Photographer: Tomohiro Ohsumi/Bloomberg

7:01 PM AEST
April 28, 2015

China’s central bank is considering expanding a new lending tool in an effort to bolster demand for local-government bonds, as policy makers seek to develop a municipal debt market and avoid a credit crunch.

The People’s Bank of China is discussing letting banks tap its Pledged Supplementary Lending program to buy local-authority debt along with other favored purposes, according to people familiar with the matter who asked not to be named as the talks are private. The PBOC last year channeled 1 trillion yuan ($161 billion) through the PSL facility to China Development Bank for redevelopment of shantytowns.

The PBOC has stepped up support for China’s slowing economy, adding monetary easing to targeted moves that add liquidity while avoiding the kind of lending binge unleashed in 2008 and 2009. The PSL move would offer support for a Finance Ministry initiative to expand the market for municipal bonds and bring transparency to borrowing by provinces and cities, much of which was done off public balance sheets.

“The loosening trend is clear because the risks are high,” said Xu Gao, Chief economist at Everbright Securities Co. in Beijing. This time the PSL “has been expanded to infrastructure and local governments, so the boost to the real economy will be quite effective,” he said.

PBOC Governor Zhou Xiaochuan has overseen a variety of innovations to channel liquidity where policy makers want it.

The PSL was used last year for extending credit to China Development Bank, the nation’s biggest policy lender, for low-cost housing. While the PBOC didn’t specify the term of that loan, local media reported it as three years. The interest rate was about 1 percentage point below the market rate.

Expanded PSL

China’s overnight money rate fell to its lowest in more than a year, a sign banks are flush with cash after the stepped up monetary easing of the past six months.

An expanded PSL could also be used for offering funds to banks for reconstruction of dilapidated housing and in connection with China’s Silk Road economic development campaign, the people familiar with the matter said.

Banks would submit collateral including local government bonds under the plan, they said.

Another step would have the PBOC broaden a so-called re-lending facility that lets some banks use outstanding loans as collateral for PBOC funding, they said. “This is still a targeted measure,” said Zhu Qibing, economist at China Minzu Securities Co. in Beijing. “Because the central bank can control which projects and which banks it gives the loans to, the effects on liquidity will be relatively limited.”

Bond Market

The PBOC didn’t immediately respond to a faxed request for comment on the plans. It’s not unusual for the central bank to stay silent for months on its actions. In the case of the PSL, reports on the program in mid-2014 weren’t publicly substantiated until December. A Medium-term Lending Facility that the PBOC has used to pump three-month credit to banks went officially unrecognized for weeks last year.

Developing a transparent local government bond market is one of Premier Li Keqiang’s key reforms, part of a broader effort to reduce leverage in an economy that over-relied on investment for growth in recent years. Provincial authorities estimated they had 16 trillion yuan ($2.6 trillion) in liabilities in a review earlier this year, the China News Service said April 25, citing a Ministry of Finance official -- a 47 percent jump from June 2013.

In a bid to break regional governments’ habit of borrowing off their balance sheets, policy makers last month announced a program that will convert as much as 1 trillion yuan of such debt into municipal notes this year. Finance Minister Lou Jiwei said March 27 the limit may be expanded.

Local governments are planning to sell more than 1.7 trillion yuan in municipal bonds this year, up from 400 billion yuan in 2014.

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