China Opens Taps to Policy Banks in Bid to Sharpen Stimulus

  • Lending for policy banks now approved at start of each month
  • Targeted stimulus channels money where policy makers want it

China’s central bank is turning on the credit taps to its policy banks as it seeks to support the economy by channeling credit to designated areas of the government’s choosing.

The Pledged Supplementary Lending program used to fund its three policy banks for investment in areas such as shantytown development will now be allocated at the start of each month, the People’s Bank of China said late Tuesday. In the past, policy banks needed to seek roll overs from the central bank each month, imposing a form of lending restraint in case such funds weren’t forthcoming.

No cap on lending or expiration date for funds were set in Tuesday’s statement, clearing the way for increased credit allocation from the lenders: China Development Bank, Agricultural Development Bank and Export-Import Bank. The outstanding amount drawn via the PSL at the end of April was 1.39 trillion yuan ($214 billion).

"The pledge shows the PBOC is determined to support credit expansion to stabilize economic growth," said Ming Ming, head of fixed income research at Citic Securities Co. in Beijing, who previously worked in the central bank’s monetary policy division. "It’s reassuring as the market is expecting a slowdown in loan growth in April."

The move helps local governments tasked with urban redevelopment projects to refinance high debt loads, while avoiding a broad cash infusion to the entire economy that may inflate asset bubbles in equities or the apartment markets of Shanghai and Shenzhen. It may also boost growth more than the blunter move of cutting benchmark interest rates or banks’ required reserve ratios because it channels funding more directly to businesses, rural areas and urban redevelopment.

The PBOC said it will grant the PSL to the three policy banks at the beginning of each month starting in May based on their targeted loan value in the prior month. While it has extended PSL loans every month in the last 12 except for December and April, the promise to renew funding ahead of time marks an escalation in its funding support.

The PBOC has held the main interest rate at a record low since October after a series of reductions starting late 2014. While such easing has shown recent signs of gaining traction, with an across-the-board rebound in March data, it has also been accompanied by an increase in debt to 2.5 times the size of the economy and soaring home prices in the nation’s biggest cities. Economists have dialed back forecasts for additional monetary easing as a result, with targeted stimulus seen as more likely.

The three policy banks can borrow the money at an annual rate of 2.75 percent in exchange for collateral such as bonds or other assets. That compares with the benchmark one-year lending rate of 4.35 percent and the 3.29 percent yield on China Development Bank’s five-year bond traded on the country’s interbank market as of May 3. The PSL rate is down from 3.1 percent in June.

The changes to the PSL are a faster path to supporting economic growth than structural reforms to overhaul inefficient state-run enterprises, according to Niu Li, a Beijing-based economist at the State Information Center, a research arm of the National Development and Reform Commission, the nation’s chief planning agency.

"The PBOC is taking a shortcut to help the real economy by leveraging the role of policy banks," Niu said in an interview. "The projects of policy banks are closely related with the real economy, such as the redevelopment of shantytowns and urban pipelines, so we can see policy banks are playing a bigger role in supporting growth."

— With assistance by Heng Xie, and Zheng Wu

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