Moderate monetary easing ‘to continue’

Moderate monetary easing might have started and would continue for some time as China looks for more ways to plug the medium and long-term liquidity shortfalls in its banking system, said experts.

The flexible adjustment is also necessary to prevent an economic slowdown in the second half of this year, they said.

The banking system may face stress when it needs to pay back around 498 billion yuan ($77.76 billion) under the medium-term lending facility (MLF) later this week. This, coupled with other factors that will reduce liquidity including tax payments and bond maturity, would mean that lenders would require new channels to raise funds.

Meanwhile, monetary authorities decided on June 1 to expand the range of financial instruments that can be pledged when commercial and policy banks borrow money through MLFs, an innovative monetary policy tool to inject base money.

According to the announcement, AA rated bonds and above, backed by credit to small and micro companies, the green economy and the agriculture sector; quality loans to small and micro enterprises and green businesses; and other corporate bonds rated AA+ and AA, could be used as collaterals for MLF operations.

Before the announcement, the People's Bank of China, the central bank, only accepted high-grade bonds, including Treasury bonds, central bank bills, policy bank financial bonds, local government bonds and AAA rated corporate bonds.

The move is expected to release about 1.38 trillion yuan of funds for commercial banks, said Ming Ming, an analyst with CITIC Securities.

Further liquidity injection is also possible through a reduction in the cash component set aside by commercial banks for future, or through two or three cuts in the reserve requirement ratio, as a "much stronger" measure to support bank lending, he said.

Wendy Chen, an economist with Nomura Securities, called the move "a sign of moderate monetary easing" but said its immediate effect is likely to be limited. She expects the monetary authority to introduce more moderate policy easing measures to boost domestic demand as internal and external headwinds may add downside pressure to economic growth.

"The policy change will provide more support for small enterprises, the green economy and the agriculture sector in particular," she said.

The PBOC had in its monetary policy report for the fourth quarter of 2017 disclosed that MLFs “have become an important channel for the central bank to inject base money”.

Credit lending and collateralized lending now are the two options for the central bank to provide base money, but the former could entail credit risks, experts said, adding that the PBOC has also created innovative monetary policy instruments like standing lending facility and the pledged supplementary lending.

The new tools are all aimed at promoting stable economic growth in light of the liquidity needs of financial institutions, especially when the Chinese currency is facing depreciation and capital outflow pressures.