Whatever you do, don’t call it a “quantitative easing.”
China’s central bank will not inject a “specific amount” of liquidity into banks under a program that lets commercial banks secure loans with local debt, Pan Gongsheng, a vice central bank governor, according to Reuters.
It seems the People’s Bank of China is a little sensitive on the subject of local government debt. The problem is no one wants it, least of all the central bank. So, the central bank is trying to put some lipstick on this pig to give commercial banks an incentive to swap the local debt.
Which brings us to Friday’s announcement that it will not flood the banking system with cash to help commercial banks buy the local government debt. For everyone anticipating a quantitative easing by the central bank, Pan wants to nip that in the bud right now.
The way local government debt can qualify as collateral “does not mean that the central bank will inject a specific amount of liquidity”, Pan told a briefing.
The Ministry of Finance has allowed local governments to swap 1 trillion yuan ($161 billion) of maturing, high-interest local debt for new municipal bonds to reduce interest costs. Just one problem, investors demand a certain rate of interest to compensate for a certain level of risk. And here, the interest rate isn’t cutting it.
You see, if the local governments don’t swap the debt there’s a good chance they will default. Which is why the central bank is willing to let commercial banks use municipal bonds as collateral for borrowing, according to sources and an official document seen by Reuters.
According to Reuters: “Sources said banks will be able to use the bonds as collateral in the PBOC’s repurchase agreement operations, as well as in standing lending facilities (SLFs), medium-term lending facilities (MLFs) and pledged supplementary lending (PSL).”
Under “targeted” debt swaps to limit impact on market liquidity and borrowing costs, local governments and banks will negotiate debt interest rates and maturities, Pan said. “Enthusiasm among financial institutions for such debt swaps is high. We believe the debt swap will be successful,” he said.
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