Sep 18, 2014 06:15 PM

500 Bln Yuan Question: Is PBOC Going to Ease Liquidity for Certain Banks?

(Beijing) – The country's financial community has been abuzz over whether the central bank will relax liquidity by selectively lending to certain banks following the announcement of weak economic indicators for August.

Bankers and analysts have been discussing the central bank's planned move, which apparently has been leaked, to lend 100 billion yuan to each of the five state-owned banks through standing lending facility (SLF), a monetary tool it began to use last year.

A source from one of the banks who manages the lender's financial market department declined to say whether the leaked information is accurate, but added: "Since everyone says it is true, it must be true."

A source close to the central bank declined to comment on whether it has made or is about to make the move. But he said the regulator carries out operations all the time and some of them are made without telling the market.

The SLF allows financial institutions to ask the central bank for loans with maturities ranging from one to three months. Interest rates are determined on a case-by-case basis. It is more flexible than cutting interest rates and the reserve-requirement ratio (RRR) because the central bank can choose which banks get the extra liquidity.

Lending 500 billion yuan to the banks through SLF is expected to have a similar effect on money supply as the RRR being lowered by half a percentage point. But because SLFs mature quickly, the long-term effect on the market is much smaller.

Economists and analysts have been watching closely to see whether the government will flood the market with liquidity to shore up the slowing economy like it did after the 2008 financial crisis.

New data from the National Bureau of Statistics shows the growth of value-added industrial output falling in August to 6.9 percent year on year, the lowest level since December 2008. Fixed-asset investments were also down.

An pessimism seems to be gaining ground. UBS cut its forecast for China's GDP growth rate this year from 7.3 to 7.2 percent, citing the weak data.

Experts say the pressure has grown for the central bank to ease liquidity to stabilize market outlook. Huatai Securities said the government's best policy option at the moment is to implement small-scale fiscal stimulus combined with targeted monetary easing.

China International Capital Corp., an investment bank, also said in a recent report that the regulator should provide funds to certain institutions.

A source close to the central bank said targeted lending through SLF is necessary if the regulator wants banks to keep up lending in wake of a new policy that discourages them from soliciting deposits at the end of every month.

On September 12, the China Banking Regulatory Commission said deposits at banks at the end of any month cannot deviate from the daily average for that month by more than 3 percent. This is intended to stop banks from collecting deposits in huge amounts ahead of performance reviews to bolster their financial reports, a practice that experts say is risky and harms market order.

The side effect of capping deposits means banks may not be able to lend as much as they used to, the source close to the central bank said. To support loans, he said, the regulator needs to step up lending to banks so they do not scale back loans.

(Rewritten by Wang Yuqian)

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