China is launching a 1 trillion yuan (US$161.1 billion) stimulus program to help local governments restructure trillions of dollars and encourage lending, the Hong Kong Economic Journal reported Thursday.
The debt-for-bond swap is aimed at giving provinces and cities some breathing room to repay debt.
The People’s Bank of China will allow commercial banks that bought local government bailout bonds to use them as collateral for low-cost loans from the central bank, according to the Wall Street Journal.
The goal is to provide Chinese banks with more funds to make new loans.
The action marks the latest in a string of measures taken by Beijing to boost economic activity, including three interest-rate cuts since November.
But those steps so far have failed to spur new demand, in part because heavily indebted Chinese companies and local governments are struggling with repaying mountains of debt.
At the same time, borrowing costs remain high, and low inflation makes it difficult for businesses and consumers alike to service debt.
Banks are reluctant to cut lending rates amid higher funding costs and rising defaults.
Domestic lenders are expected to be designated subscribers of the program, said Chen Xi, a senior official of Chongqing Rural Commercial Bank Co. Ltd. (03618.HK).
Chen said the bank is considering whether to subscribe to government bonds linked to municipal debt.
“The central bank is using this opportunity to provide cheap funding to commercial banks and guide down interest rates,” China economist Zhu Chaoping of UOB Kay Hian Holdings Ltd., a Singapore-based investment bank, was quoted as saying by WSJ.
“This will have similar effects as quantitative easing,” Zhu said, referring to the bond-buying programs used by the United States and European central banks to spur economic growth.
Translation by Vey Wong
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