China Readies Fresh Easing to Tackle Specter of Debt
Central bank’s shift will allow banks to swap local-government bailout bonds for loans
Under the plan, which could be put in place in the next couple of months, the People’s Bank of China will allow Chinese banks to swap local-government bailout bonds for loans as a way to bolster liquidity and boost lending, the officials said. The strategy—dubbed Pledged Supplementary Lending—is similar to the long-term refinancing operations, or LTROs, used by the European Central Bank.
The Wall Street Journal reported last week that the central bank was considering such a plan. Press officials at the PBOC didn’t respond to a request for comment.
Adopting the strategy would mark a major shift in the policies of the Chinese central bank, which has traditionally relied on interest rates and banks’ reserve requirements to regulate money supply. Now, the slowing Chinese economy, which has resulted in a surge in the amount of capital leaving China’s shores, is pressing the PBOC to come up with new ways to beef up bank lending and lower borrowing costs.
Driving the new program is Beijing’s struggle to solve the country’s mounting local-government debt problems. The latest official data show that borrowing by city halls and townships across China jumped nearly 50% from June 2013—the last time such data were available—to about 16 trillion yuan ($2.6 trillion). Such debt is responsible for a quarter of the buildup in China’s overall domestic debt since 2008, with the International Monetary Fund warning that China’s debt level is growing more rapidly than debt in Japan, South Korea and the U.S. did before those countries tumbled into recession.