PBOC goes back to drawing board on bond/loan swaps
OK. Let’s try this one again. Can anyone say quantitative easing in Chinese?
Last week, Asia Unhedged wrote about how the bond auctions of several provincial governments had to be postponed because no one wanted to buy the bonds. After going back to the drawing board, the People’s Bank of China now plans to launch its own version of the credit-easing programs seen in the U.S. and Europe, reported the Wall Street Journal on Tuesday.
The central bank will allow Chinese banks to swap local-government bailout bonds for loans as a way to bolster liquidity and boost lending, said the Journal.
The big problem is that in an effort to stimulate the economy regional governments have borrowed huge amounts of cash to fund infrastructure projects, said the Financial Times. Now the Chinese economy is slowing down and many citizens are pulling huge amounts of capital out of the country and investing it overseas. But as the property and manufacturing industry suffer, policy makers want to cushion the economic slowdown into a soft landing with more infrastructure spending.
Amid all this many of these loans are coming due. So the central bank wants to help the local governments by converting short-term high interest loans into low-interest long-term bonds.
Strictly speaking it’s not quantitative easing. The central bank just wants more people to buy the debt of the cash-strapped local governments. And one way it hopes to accomplish this is by letting institutions use the debt as collateral for loans to commercial lenders. China’s Finance Ministry said it would do this by allowing heavily indebted local governments to sell new bonds with explicit government guarantees to replace their existing debt — mostly bank loans,” said the Journal
As of now it looks like a big cluster munch. But stay tuned — things are likely to get more involved going forward.