While you weren’t looking, the PBoC launched a soft version of QE.
If that’s not quite right, one can quite easily compare it to the Fed’s various liquidity facilities which allow banks to fund loans and other assets, thereby leaving balance sheets unencumbered in the crisis.
Specifically, the PBoC will deploy some 400 billion yuan to buy unsecured loans made to small- and medium-sized businesses by local banks on a quarterly basis. The program will work through a special purpose vehicle.
Qualifying loans made between March 1 and year-end must have maturities of six or more months, apparently. Eligible lenders include city commercial banks, rural commercial banks, rural cooperatives and private banks.
There are some key stipulations to the program. Banks have to buy back the loans in a year, and the PBoC is not on the hook if the assets sour. Banks will still collect interest from borrowers, and it seems as though there is no interest on the facility – that is, if lenders repurchase the loans from the PBoC, this is costless liquidity for a year.
The idea, obviously, is to prod small banks into lending more. More generally, this is just another effort to unclog the monetary policy transmission channel which can be vexingly stubborn in China, especially during times when demand for credit is subdued. Credit growth data was robust in March and April, but the economy is seen needing much more stimulus going forward.
Beijing says the new program has the potential to increase the amount of unsecured loans to small businesses by as much as 1 trillion yuan.
One assumes that with these loans parked on the PBoC’s balance sheet, banks will enjoy some relief in terms of capital requirements, and that will be passed on to would-be borrowers in the form of lower-cost lending – or something. The “best-laid plans”, and such. Here’s a quick bit from SEB:
The asset purchase program will ease the pressure on local and regional banks. Local and regional banks face tremendous pressure to meet regulatory requirements on capital and liquidity. As of 2018, around 40- 50% of loans held by urban and rural commercial banks were directed to SMEs. Smaller banks are more reliant on interbank funding. Moreover, their deposit rates cannot be 55% higher than the benchmark deposit rate, limiting their ability to compete for deposits.
China has cut key rates on a number of occasions in 2020, and more reductions (including RRR cuts) are surely in the cards.
Beijing abandoned its growth target for this year due to global economic uncertainty and the world’s second largest economy suffered an unprecedented contraction in the first quarter. But in “first in/first out” fashion, China is seen recovering more quickly than the rest of the world.
Back in February, a poll conducted by Tsinghua University and Peking University received quite a bit of press. Among the most alarming findings: 85% of Chinese SMEs said they may run out of cash within three months.
One assumes the situation is mitigated by the optically successful reopening push in China, but many businesses are no doubt still in deep distress from the epidemic.
Unfortunately, one of the side effects of crisis relending programs in China is a misuse of funds. Essentially, the country is grappling with some of the same issues that plagued the Paycheck Protection Program in the US.
“In China, too, subsidized small business loans have also become a cornerstone of stimulus. The central bank established 1.8 trillion yuan ($254.1 billion) of re-lending facilities, offering cheap funds to commercial banks, which in turn lend that out to small companies”, Bloomberg recounts, in an opinion piece dated April 21. “But much to Beijing’s dismay, instead of paying salaries or shoring up working capital, these enterprises seem to be using the proceeds to buy real estate”.
Imagine that. Greed is universal. The allure of easy profits is not the sole purview of capitalist economies.
In any event, the PBoC’s new program is “not QE” in a precise sense. Rather, it’s basically just a costless repo facility.
Of course, if you start to see the timeline for when small banks have to buy back the loans from the PBoC getting extended beyond one year, well, then you can fairly call it whatever you want.
