China Central Bank Signals Shift in Monetary Policy Focus
A rare announcement by the People’s Bank of China (PBOC) that it offered liquidity to banks through its Pledged Supplementary Lending (PSL) facility, a tool to encourage credit to favored sectors, has provided another signal that the central bank is fine-tuning monetary policy to reduce some of its emphasis on deleveraging.
The PBOC doesn’t usually report its PSL transactions until the beginning of the following month, when it releases a summary of its liquidity management operations, which include other tools such as the Medium-Term Lending Facility. But the central bank announced on Monday it had handed out 80.1 billion yuan ($12.6 billion) through PSL, the same day the loans were made.
Although the value of the loans wasn’t unusually large, the disclosure was made on the first working day after the release of the PBOC’s quarterly monetary policy implementation report, a 61-page document that offers insights into the central bank’s activities and views on monetary policy and the economy. Analysts pore over the report looking for changes in the use of words and phrases that might offer signals about a possible shift in emphasis or policy direction.
In its latest report, issued on Friday evening, the PBOC made a slight modification to its description of its monetary policy goals, indicating that the central bank was more concerned with adjusting the structure of credit to the economy to make sure money flowed to the sectors the government wanted rather than on deleveraging. The phrase “strike a balance between stable growth, deleveraging and risk prevention” from the previous report was changed to “strike a balance between stable growth, structural adjustment and risk prevention.”
Some analysts saw the change in wording, along with Monday’s PSL announcement and the rolling over of MLF loans on the same day, as a sign of a shift in focus, although the report did make clear that deleveraging and tackling financial risks continue to be top priorities.
Wen Bin, chief analyst at China Minsheng Banking Corp., said that the phrase “structural adjustment” was used in Premier Li Keqiang’s annual work report to the National People’s Congress in March and referred to “encouraging funds to flow more toward small and micro businesses, agriculture, rural areas, and rural residents, and poor areas.”
Although credit growth has slowed this year, the allocation of credit has improved, especially with regard to the increasing proportion of loans to the agricultural sector, which shows that the financial sector’s support for the real economy has not fallen, Wen said. The current priority is to ensure overall leverage remains stable while encouraging funds to flow toward the areas of the economy that need it, he said.
The government’s deleveraging campaign is aimed at defusing financial risk and tackling high levels of debt, especially among local governments and state-owned enterprises. The PBOC’s quarterly report devoted two pages of the report to the issue, and noted that the growth in the country’s overall leverage ratio had slowed. Debt as a percentage of gross domestic product (GDP) rose just 2.7 percentage points in 2017 to 250.3%, down from an average annual increase of 13.5 percentage points from 2012 to 2016. The corporate debt to GDP ratio fell 0.7 percentage points in 2017 to 159%, the first decline since 2011.
The PBOC conducts PSL transactions every month as part of its liquidity management, and the funds are mainly used to lend to the three policy banks — China Development Bank, Agricultural Development Bank of China, and the Export-Import Bank of China — with the aim of supporting shantytown redevelopment, infrastructure construction and other key projects.
Ming Ming, chief fixed-income analyst at Citic Securities, said that the PBOC’s decision on Monday to roll over the maturing MLF loans rather than force banks to repay them, and the announcement of the details of the PSL transactions on the same day they were carried out were significant.
“This deliberate emphasis on PSL shows that the central bank intends to stabilize market expectations, maintain reasonable and stable liquidity, and neutralize the impact of the declining scale of liquidity releases via MLF,” he said.
“At the same time, the release of directed credit (via PSL) will help guide funding, and ease tight liquidity in the relevant industries,” Ming said. As PSL is a medium-term lending tool, it will also support the PBOC’s stated goal of increasing longer-term liquidity while reducing short-term liquidity, he said.
Contact reporter Ke Baili (firstname.lastname@example.org)
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