Big Take: PBOC Vowed to Shore Up Chinese Economy Announcing Several Broad Based Measures

Chinese central bank announced measures to support the economy which has been yet again hit by lockdown amid fresh new wave of COVID-19 infections. However, the focus on boosting credit likely points towards the central bank’s option for broad-base easing are shrinking.

The  People’s Bank of China told banks to meet the “reasonable funding needs” of local government financing vehicles, according to a document released with the foreign exchange regulator Monday, as reported by Bloomberg.

It also urged more lending to works in the informal sectors such as taxi drivers, online shop-owners and truck drivers, and provide longer-term and cheaper loans to small businesses.

The central bank announced 23 measures and vowed to tackle the economic slowdown with target tools including  resending program which provides funds for banks to lend to sectors that include those hit by the pandemic. The various re-lending programs are expected to lead to 1 trillion yuan ($157 billion) in additional bank loans,  the central bank said.

The move followed after China reported its biggest decline in consumer spending and worst worst unemployment rate since the early months of the pandemic in March.

The support for LGFV financing is rare as regulators have been tightening the rules governing the sector in recent years in an attempt to push local governments to bring their debts back on to their official balance sheets.

According to Goldman Sachs Group Inc report, the announcement suggests that  “the chance of broad policy interest rate and RRR cuts is lowered further as the PBOC did not mention them in the discussion on monetary policy tools,”.

“Instead, the PBOC’s monetary easing could be more reliant on targeted policy tools in coming quarters.”

The PBOC said, banks should lend more to infrastructure projects and purchase local government bonds  to help them front-load investment, and shouldn’t “blindly” suspend or withdraw loans from LGFVs, to ensure that they can deliver projects under construction. Policy banks will also need to to step up their financing to major investment projects, it said.

The central bank also Calle don local authorities to set  appropriate minimum down-payments and mortgage rates based on each city’s conditions, and urged banks to support the reasonable financing needs of property developers and construction companies.

The central bank also asked banks to increase the share of private companies among the recipients of new corporate loans.

As tax rebates and transfer payments to local governments, the PBOC transferred  600 billion yuan of profit to the central government as of mid-April.

The profit transfer had the impact of increasing the base money supply by 600 billion yuan, which has the same effect as a 25 basis-point cut in the reserve requirement ratio, it said.

Meanwhile, the China Banking and Insurance Regulatory Commission vowed to increase financial resources for the logistics, transportation and courier industries, and use relending funds to lower financing costs.

The regulator noted the following measure will help smaller business suffering from  temporary difficulties due to Covid.