25 August 2019
PBoC chief economist Ma Jun has ruled out quantitative easing, saying the central bank has other means to maintain "reasonable liquidity". Photo: HKEJ
PBoC chief economist Ma Jun has ruled out quantitative easing, saying the central bank has other means to maintain "reasonable liquidity". Photo: HKEJ

PSL or QE? Whatever you call it, the endgame is the same

The People’s Bank of China (PBoC) is reportedly considering its own version of quantitative easing (QE) by directly buying commercial bank assets or local government debt.

The move is aimed at injecting more liquidity into the financial system and spurring lending to reduce financing costs and avoid deflation.

China may adopt a different approach to monetary easing but the endgame is the same.

PBoC chief economist Ma Jun has denied any plan to undertake QE.

He said the central bank has other means to maintain “reasonable liquidity” and keep “steady growth” in money and credit supply. There’s no need to buy new local debt or print money, a euphemism for QE.

In fact, the Chinese central bank can use targeted refinancing and adjustments to benchmark interest rates and reserve requirement for commercial banks to achieve those objectives. 

Also, by law, the central bank is prohibited from offering direct financing to the government.

Apart from these monetary tools, the government could also use fiscal or structural reform measures.

The PBoC is reportedly also considering expanding the pledged supplementary lending (PSL) scheme, Bloomberg reported, citing unnamed sources.

Chinese banks will be allowed to tap the program to buy local government debt, easing the burden of municipal administrations.

PSL might replace RRR cuts as a vehicle for injecting money into the financial system.

Last year, there was no large-scale use of PSL. A debt swap plan for local government debt offered the PBoC a perfect opportunity to deploy a new monetary tool.

RRR cuts are not a long-term solution and excessive liquidity would be widely criticized by the market.

As a result, the Chinese central bank has had to rely on something else, according to analysts from CITIC Securities.

Banks are willing to participate in the debt swap program but they are struggling with issues relating to maturities.

The bulk of local government debt is long-term but banks are lending money at shorter durations.

The expanded PSL program will help ease the credit crunch caused by this mismatch, optimizing money supply and demand among local governments, the Ministry of Finance, the PBoC and commercial banks.

PSL will enable banks to offer loans for reconstruction of dilapidated housing and help fund China’s Silk Road economic development program, according to reports.

These reports suggest that the PBoC will pump a large volume of liquidity into the market — call it QE or any other name.

China’s margin trading and short selling balance is expected to top 1.82 trillion yuan (US$293.32 billion) this week.

Meanwhile, the red-hot equity market has been attracting retail investors.

Statistics from the China Securities Depositary and Clearing Corp. show that 3.25 million new stock accounts were opened between April 13 and 17, up 93 percent from the previous month.

As of April 17, there had been 198 million stock accounts in the A-share market, which means about one million Chinese are investing in the stock market.

Individual investors can bet on HSBC China Dragon Fund (00820.HK) or Value Partners Group (00806.HK) to gain exposure to the mainland market. Mainland banking plays and insurance counters are also attractive.

This article appeared in the Hong Kong Economic Journal on April 29.

Translation by Julie Zhu

[Chinese version中文版]

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columnist of the Hong Kong Economic Journal

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