Credit-asset pledged relending expansion not QE

The expansion of a credit-asset pledged relending program should not be misinterpreted as a Chinese version of quantitative easing (QE), a senior economist of the central bank told Xinhua on Wednesday.

It will not have a significant impact on total liquidity and should not be misread as a kind of QE, said Ma Jun, chief economist at the research bureau of the People's Bank of China (PBOC).

Credit-asset pledged relending allows banks to refinance high-quality credit assets rated by the central bank. Under the program, the central bank lends money to commercial banks which use high-quality credit assets as pledge.

Relending is a traditional form of central bank's base money supply, but the PBOC previously had a strict requirement of accepting only government bonds, PBOC notes, bonds from policy banks and top-rated corporate bonds as collaterals.

The PBOC announced last Saturday it would expand the pilot program from Shandong and Guangdong to nine municipalities and provinces, including Shanghai, Tianjin, Beijing and Chongqing.

The move is intended to cut borrowing costs and guide more funds into agriculture and small enterprises to boost the real economy, the PBOC said.

The expansion has been characterized by some as a Chinese-style quantitative easing, with speculation that it will bring as much as seven trillion yuan into the market.

"The expansion of the program does not mean the central bank will inject liquidity on a large scale," said Ma, adding that the annual growth target of outstanding broad money supply (M2) will remain unchanged at 12 percent.

He said the expansion of the program is prerequisite for local financial institutions to obtain more liquidity support, but it does not necessarily mean all the local financial institutions will automatically receive liquidity support.

The main purpose of the expansion is to fine-tune liquidity management by the central bank, especially to facilitate short-term fund injections to small and medium banks, to avoid financial risks, said Zeng Gang of the Chinese Academy of Social Sciences.

He said the move can be seen as an attempt by the central bank to maintain financial stability and raise the banking system's capability to support the real economy.

China's positions for forex purchases, an important indicator for foreign capital flow in and out of China as well as domestic yuan liquidity, witnessed a record dive of 723.8 billion yuan (113.6 billion U.S. dollars) to 28.2 trillion yuan in September.

Concerns over RMB deprecation picked up after improvement of the RMB central parity rate quotation mechanism on August 11, and enterprises and residents' forex purchase willingness has improved while their forex sales willingness has declined accordingly, said a report by the Financial Research Center of the Bank of Communications.

In addition, the intensified fluctuations of the capital market and the drastic drop of stock indexes add to the pressure of short-term capital outflow, according to the report.

On a factual basis, the PBOC's relending program is entirely different from operations by its European and American counterparts.

Unlike the U.S. Federal Reserve and the European Central Bank, which directly purchase of bonds and other assets from commercial banks, China's central bank is forbidden by law to buy them directly. The PBOC is only accepting bank assets as pledge to lend them money.

Unofficial analysts have compared the relending program to a channel of supplying base money similar to repurchase agreement (repos), except that the pledge is loan assets rather than government bonds.

"We don't think this new re-lending program should be interpreted as 'Chinese QE', as described by some media and market observers," said UBS economist Wang Tao in a research note.

The program could help PBOC to better calibrate the size and scope of its liquidity injection operations, by expanding the list of pledge to qualified loans and fine-tuning what assets may or may not qualify as pledge, wrote Wang.

"Such move could allow PBOC to deliver liquidity in a more targeted fashion to those that most needed it", observed Wang, "the new relending program can be used to direct bank lending to desirable sectors, such as agriculture and SMEs."

The program is an important part of the PBOC's counter-cyclical liquidity management, as it broadens the pledge requirement, such as lowering the requirement when market liquidity supply is tight, and raising it when supply is strong, said Shen Jianguang of Mizuho Securities, citing China Finance, an official magazine of the PBOC.

"While expanding these operations will likely lead to more such relending by local PBOC branches, the overall amount will be tightly regulated by the headquarters," said Song Yu of Goldman Sachs.