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Frank Tang

The creation of a bond swap facility has moved China one step closer to full on quantitative easing (QE), analysts have said.
The People’s Bank of China (PBOC) unveiled its bill swap mechanism on Thursday evening, the latest in its efforts to counter the double-headed assault of a trade war with the United States and a broad-based economic slowdown at home.
This will allow holders to swap commercial bank perpetual debt - that is, debt without a maturity date – for central bank bills to be used for borrowing collateral.
A PBOC statement said this will “increase the financing support for the real economy”.
Immediately after the launch, the China Banking and Insurance Regulatory Commission eased restrictions on insurers looking to invest in perpetual debt.
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“It is essentially Chinese version of QE and a sort of required reserve ratio cut based on the medium-lending facilities collateral expansion,” Hua Changchun, chief economist at Guotai Junan Securities, wrote in a research note.
Other analysts agreed that easing - a mechanism for central banks to buy government debt to boost the money supply - is imminent.
“For sure the easing is on the way. We can see it in terms of different measures taken and the mandate given in the statement of the Central Economic Work Conference,” said Louis Kuijs, head of Asia at Oxford Economics, saying that the PBOC’s actions closely resemble the European manner of QE
Others fear that this sort of action might spook markets into thinking the floodgates of stimulus had been thrust open.
Chinese finance ministry and central bank on same page on growth after Xi warns of risks to economy
Ding Shuang, chief Greater China economist of Standard Chartered Bank, said banks’ capital constraint is just an area that the central bank tries to improve the policy transmission mechanism.
“There are already lots of liquidity in the market. Further easing would give the impression of an all-out stimulus,” he said.
More than 40 large banks, including the five largest state banks and 12 national joint-stock commercial banks, will be eligible for the bond swap programme.

The aim is to provide more credit to the real economy, via the banking system, but whether banks are willing to on-lend the capital to companies is another matter.
Analysts expect more activity from the PBOC very soon.
“We believe the central bank may lower the benchmark lending rates in the middle of this year. It will go further in terms of credit risk mitigation tools, and possibly buy Treasury bonds, local government bonds, financial bonds or even corporate bond directly,” Hua said.


This is the latest in a line of growth boosting measures undertaken by the PBOC in recent days and weeks, designed to give a shot in the arm to the ailing economy, which grew at 6.6 per cent in 2018, the lowest rate for 28 years.
On Wednesday, meanwhile, the central bank unveiled a targeted medium-term lending facility, aimed at injecting 257.5 billion yuan into the market.
Chinese Premier Li Keqiang is due to release this year’s growth target in his government work report to the National People’s Congress on March 5.
The market expects targeted growth of between 6.0 and 6.5 per cent for 2019.


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China economy

China’s central bank just moved one step closer to flinging open the floodgates of stimulus

Headquarters of the People's Bank of China (PBOC), the central bank, is pictured in Beijing, China September 28, 2018. Photo: Reuters

FILE PHOTO: Chinese 100 yuan banknotes are seen on a counter of a branch of a commercial bank in Beijing, China, March 30, 2016. REUTERS/Kim Kyung-Hoon/File Photo

Economy

China Economy

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China

This will allow holders to swap commercial bank perpetual debt for central bank bills
A PBOC statement said this will “increase the financing support for the real economy”


Immediately after the launch, rules were loosened on insurers wanting to invest in perpetual debt.


US-China trade war: All stories

Central banks

Banking & finance

People’s Bank of China (PBOC)

China’s central bank just moved one step closer to flinging open the floodgates of stimulus

.css-1mniedq{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;}This will allow holders to swap commercial bank perpetual debt for central bank bills A PBOC statement said this will “increase the financing support for the real economy”

This will allow holders to swap commercial bank perpetual debt for central bank bills

A PBOC statement said this will “increase the financing support for the real economy”