China's Central Bank Expands Collateral for Mid-Term Lending

(Bloomberg) -- China’s central bank broadened the range of collateral it accepts in its medium term lending operations, adding debt instruments tied to small-business funding and the green economy.

The People’s Bank of China said it will accept assets including AA-and-above-rated bonds backed by credit to small companies, the green economy, or agriculture, as well as corporate bonds with AA+ and AA ratings, and quality loans to small and green businesses as MLF collateral, according to a statement published on its website late Friday.

The move is aimed at lowering funding costs and enhancing support to smaller businesses, the PBOC said. Previously, MLF collateral included treasury bills, central bank notes, policy banks bonds, local government bonds and corporate bonds with an AAA rating.

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Expanding the scope of collateral gives smaller lenders with less highly-rated assets better access to loans from the central bank. It also makes bonds by small companies or businesses in the rural sector more attractive to investors, promoting the liquidity conditions for those companies.

While previous collateral includes only bonds and central bank bills, the inclusion of some of the loans bodes well for an initiative to contain shadow banking and encourage on-balance-sheet financing.

What Our Economists Say: 

“The PBOC has made another move that combines micro-easing with incentives to shift the balance of lending toward firms that fit with reform priorities,” said Bloomberg chief Asia economist Tom Orlik in Beijing.
“One question is why the move is coming now, when growth appears solid? Concern about the risk of defaults in low grade corporate debt might be one factor. June’s seasonal liquidity crunch might also be on policy makers’ minds.”

The PBOC didn’t specify the value of extra collateral that would be made eligible.

Chinese lenders would be facing great pressure to repay maturing MLF lending due over the next few months, prompting analysts to raise bets the PBOC may soon repeat a tactic used in April: cutting the Reserve Requirement Ratio to give banks liquidity so they can pay back the debt.

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