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China’s expanded relending program to aid firms, economy
On Tuesday evening China’s central bank, the People’s Bank of China (PBoC), expanded its loan-collateralized re-lending program from two provinces previously to 11 provinces, setting the stage to expand credit to firms and help balance FX outflows as the economy continues to slowdown to record levels.
The Asset 13 Oct 2015

On Tuesday evening China's central bank, the People's Bank of China (PBoC), expanded its loan-collateralized relending program from two provinces previously to 11 provinces, setting the stage to expand credit to firms and help balance FX outflows as the economy continues to slowdown to record levels.

 

Under this new liquidity program, PBoC will accept qualified bank loans (based on its internal rating) as collateral for relending support to banks. Relending is a traditional form of PBoC's base money supply, and the current relending rates are 3.25% for 20 day, 3.55% for 3-month, 3.75% for 6-month, and 3.85% for 1-year terms.

 

Major media firms have been calling the expanded relending program as another tool the PBoC can use for quantitative easing, but UBS economist Tao Wang, believes that this is not so, and instead the government has using this ease monetary policy and increase credit growth to reasonable levels.

 

"We don't think this new relending program should be interpreted as "Chinese QE", as described by some media and market observers. The relending program is just another channel of supplying base money similar to repurchase agreement (repos), except that the collaterals are loan assets rather than government bonds," says Tao.

 

Tao adds that the new policy will not expand liquidity drastically, but just enough to allow the PBoC stronger control of injecting liquidity in the market. "This new form of liquidity could help offset liquidity drainage of FX outflows and stabilize base money growth. The creation of the new tool on its own will unlikely lead to massive credit expansion, as the amount and scope of liquidity injection through this program is subject to PBoC control and has to be put in the context of overall base money and broad money supply," says Tao.

 

The PBoC's decision to expand the relending program comes at a time when smaller regional banks may not have enough treasury and financial bond holdings to access existing liquidity tools.

 

Tao mentioned that the loan-collateralized relending program could help the PBoC to better "calibrate the size and scope of its liquidity injection operations, by expanding the list of collaterals to qualified loans and fine-tuning what asserts may or may not qualify as collateral."

 

The move by the PBOC will be welcomed by treasurers in city and commercial banks across China, as it could help them improve the delivery of liquidity for specific purposes. Tao states the loan-collateralized relending program is another liquidity tool to supply base money, and that they continue to expect Chinese monetary policy to maintain an easing basis with more rate and RRR cuts in the pipeline, along with "proactive liquidity provisions via liquidity instruments."

 

 

 

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