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PBOC’s re-lending plan seen as selectively steering credit to help spur economy

The latest iteration of a re-lending scheme, unveiled last weekend by China’s central bank, will help steer new lending towards private companies in an effort to fuel growth

PUBLISHED : Thursday, 15 October, 2015, 1:17pm
UPDATED : Thursday, 15 October, 2015, 3:51pm

Mainland Chinese policy makers are using new tools to stimulate the economy, in a strategy of selectively channelling lending towards private enterprise, according to analysts.

A re-lending programme, which expands an earlier lending scheme, unveiled on Saturday by the People’s Bank of China, is expected to inject 50 billion yuan into the market.

Though limited in size, analysts said the initiative will improve the PBOC’s ability to calibrate the scope and size of its liquidity injection operations.

“It is the authority showing their determination to support the more productive parts of the economy,” Li Yimin, a senior analyst with the Shenwan Hongyuan Securities, said.

Under the new arrangement, banks in 11 provinces will be able to use qualified loans as collateral to borrow funds from the central bank. The banks have been directed to channel these funds towards smaller businesses, as part of a targeted lending strategy to stimulate job creation.

The PBOC’s weekend announcement was made against the backdrop of data showing China’s manufacturing and external trade data extending sharp contractions.

One analyst viewed the lending programme as falling short of the quantitative easing programmes embraced by central banks in Japan, United States and elsewhere, which have effective is raising liquidity on a broad scale throughout their respective economies.

A more modest and targeted credit expansion is likely the intention behind this lending scheme, wrote Wang Tao, the chief China economist with UBS in a note Monday.

“The central bank has shown little desire to significantly ease monetary policy while credit growth is also constrained by weak corporate credit demand,” Wang said.

She said liquidity injected through this programme is subject to PBOC control and has to be put in the context of overall base money and broad money supply.

Unlike earlier programmes, this one is being rolled out with smaller banks in mind, lenders which in the past have struggled to access cheap funding from the PBOC.

Li Qilin, an analyst with China’s Minsheng Securities, said the lending programme would provide a new tool to support the economy.

“Through this pilot, the PBOC can directly support some new growth engines, like the small and medium companies, which are dynamic but usually cash-strapped, by offering favourable discount rates and interest rates when granting credit asset pledged loans,” he said.

Li said the programme was actually a selective easing tool similar to the pledged supplementary lending introduced by the PBOC last July, which broadened the definition of collateral.

Demand for credit in China has remained weak despite five interest-rate cuts and three broad reductions the ratio of funds that banks are required to set aside as reserves since November.

Loans to the manufacturing sector fell to 49.3 in the third quarter, the first time it has been below 50 since the central bank started releasing the data in 2004, according to PBOC data.

Li Yimin, of Shenwan Hongyuan Securities, said the new policy marks a departure from traditional policy at the PBOC. She cautioned, however, that the policy of selective easing won’t be a quick fix for China’s cooling economy.

“It still takes time to see whether these selective easing measures can effectively arouse vitality in economy,” Li said.

The National Development and Reform Commission, one of the regulators for the nation’s corporate bonds, has also joined efforts to rekindle credit demand among Chinese companies. Among its initiatives, the NDRC is seeking to expand financing channels for companies.

According to a report by China’s 21 Century Business Herald on Wednesday, issuers of bonds with AAA credit ratings will be exempted from the regulator’s review process. Other issuers of bonds with AA credit ratings will also see the verification process largely shortened.

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