A Chinese central bank loan that’s almost the size of the U.S. bailout of American International Group Inc. has spurred speculation that policy makers have adopted a new form of monetary easing to shore up growth.
While the People’s Bank of China warns debt is rising quickly, and credit expansion is already high, that didn’t stop it from extending what Chinese media reported is a 1 trillion yuan ($162 billion), three-year loan to a state development bank. By comparison, the AIG rescue amounted to $182 billion.
The loan, designed to lower financing costs for government-backed housing projects, marks a “qualitative” easing by Governor Zhou Xiaochuan, according to Citigroup Inc. economists. The move, which the PBOC has yet to confirm publicly, also takes the central bank deeper into fiscal-policy territory after it gave quotas for discounted lending for agriculture, small businesses and low-income housing.
“It shows the central bank’s efforts to lower borrowing costs,” said Ding Shuang, Hong Kong-based senior China economist at Citigroup. The PBOC is reluctant to increase the money supply and is instead using a tool that looks like a “subsidized lending facility,” Ding said.
The PBOC and borrower China Development Bank didn’t respond to faxed questions today.
The CDB loan, along with stimulus projects from provincial authorities and the central government, and a decline in money-market interest rates, may help assure Premier Li Keqiang’s 7.5 percent economic growth target this year.
Signs of the impact of what Li has described as targeted easing were seen in the manufacturing Purchasing Managers’ Index, which rose to the highest level in more than two years in July, an Aug. 1 government-backed report showed. At the same time, the real-estate slide indicated in a gauge of services industries released yesterday helps explain why the PBOC is gearing credit toward housing.
“By providing financing for infrastructure projects, the government intends to revive growth” in real estate and ensure sufficient aggregate demand to meet this year’s targets, Dariusz Kowalczyk, senior economist and strategist with Credit Agricole SA in Hong Kong, wrote in a July 31 note.
The loan to CDB, the country’s largest policy lender, was made under a new tool called pledged supplementary lending that was reported by China Business News in June. The newspaper reported on the 1 trillion yuan, three-year credit line to CDB on July 21, and Caixin followed with a similar report.
The PBOC made no mention of pledged supplementary lending in its quarterly monetary policy report released Aug. 1, when it warned that money supply and credit have increased rapidly. The central bank, which is involved in regulating some aspects of the banking industry, said it will “deepen reform” of CDB to support redevelopment of run-down areas and city infrastructure.
The China Banking Regulatory Commission announced last week it approved CDB to start a housing-finance business to provide loans for shantytown renovation and related city infrastructure.
Under pledged supplementary lending, the PBOC offers collateralized credit directly to financial institutions to extend on to industries or projects it specifies, with the aim of lowering their financing costs, according to China Business News.
CDB offers three-year loans for shantytown projects at 5.895 percent compared with benchmark lending rates of 6.15 percent for the same maturity, Australia & New Zealand Banking Group Ltd. said in a July 29 report.
“This is another targeted easing measure,” Chang Jian, chief China economist at Barclays Plc, wrote in a July 30 report. While the loan doesn’t represent “broad loosening,” it has “reduced recent market concerns about a shift in the PBOC’s stance away from easing towards neutral or tightening,” she said.
Wang Tao, UBS AG’s chief China economist, says the measure is part of trying to “optimize” the implementation of its existing monetary stance, and doesn’t constitute a shift in policy, according to a July 24 report.
In its Aug. 1 report, the PBOC said targeted measures have become a “new trend of major central banks” since the global financial crisis started and that it will keep using tools such as relending and rediscounting to guide institutions to “optimize their credit structure.”
The CDB loan is the equivalent of an across-the-board cut of 1 percentage point in the ratio of deposits banks must hold as reserves, JPMorgan Chase & Co. estimated, scrapping its forecast for two 50 basis-point cuts from the current 20 percent reserve requirement ratio for large banks.
“A general easing in credit often results in funds flowing into undesirable areas,” including local governments and property developers, JPMorgan’s Hong Kong-based economists led by Zhu Haibin wrote in an Aug. 1 report. “The adoption of targeted quantitative measures is an interim solution to this problem until China establishes an efficient market for credit allocation.”
The PBOC itself cautioned in its monetary policy report that measures such as targeted reserve-ratio cuts, “if implemented for a long period, may cause some problems.”
Citigroup’s Ding said the loan to CDB is “not very ideal.” “The central bank can control its lending rate to China Development Bank, but it still can’t control the rates further down,” he said.
Economists at Citigroup, ANZ and JPMorgan warned that the use of pledged supplementary lending to influence borrowing costs for some sectors could undermine efforts to liberalize interest rates and let markets determine the allocation of resources.
The “behind the scenes” implementation of the PBOC’s targeted tools could also cause “unnecessary market uncertainty,” according to JPMorgan’s Zhu, who previously worked at the Bank for International Settlements. “Unless disclosure of such operations improves, policy transparency will suffer.”
— With assistance by Nerys Avery