A commuter walks past the People’s Bank Of China (PBOC) headquarters in the financial district of Beijing, China. (Photographer: Brent Lewin/Bloomberg)

PBOC's Collateral Move a Targeted Tweak, Not Major Easing Step

(Bloomberg) -- The decision by the People’s Bank of China to expand the types of collateral it allows banks to use when they borrow money is intended to help certain sectors, and shouldn’t be interpreted as a major easing of policy, according to economists.

This will allow extra bonds worth between 400 billion yuan ($62.3 billion) and 600 billion yuan to be included in the pile of eligible collateral for the central bank’s Medium-term Lending Facility operations, Ming Ming, head of fixed-income research at Citic Securities Co. in Beijing, wrote in a research report Monday.

The policy "eases funding difficulties for small and micro-sized companies while avoiding injecting too much liquidity to conflict with the goal of deleveraging and de-risking," Ming said, adding the newly eligible assets will equal up to 15 percent of the 4 trillion yuan in MLF loans outstanding.

The PBOC announced on Friday that it would add debt instruments tied to small-business and the green economy. It will now accept assets including AA-and-above-rated bonds backed by credit to small companies, or those engaged in environmental-improvement projects, agriculture, as well as corporate bonds with AA+ and AA ratings, and quality loans to small and green businesses as MLF collateral.

Loan Collateral Expansion May Help Ease Credit Squeeze

The move aims to lower funding costs and enhance 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.

Yi Says PBOC to Keep Increasing Support for Smaller Companies

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 from small companies or rural businesses more attractive to investors, promoting liquidity for those companies.

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.”

Chinese lenders face significant pressure to repay maturing MLF lending due over the next few months, prompting analysts to raise bets that 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 debts.

The decision is "another signal of moderate monetary easing, but with limited immediate effect," Lu Ting, chief China economist at Nomura Holdings Inc. in Hong Kong, wrote in a note. The more moderate policy easing will boost domestic demand, according to Lu, a task that was stressed at a top-level meeting presided over by President Xi Jinping recently.

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