REPORT: China is considering another huge injection of stimulus

A vendor rides on a bicycle with balloons for sale along a street as heavy smog engulfs the city on December 25, 2013 in Neihuang, China. (Photo by ChinaFotoPress/Getty Images)

Chinese authorities have cut interest rates and their reserve ratio requirement twice in the past six months, and it looks like there might be more to come.

According to the Wall Street Journal the PBoC is considering adopting a program that will allow Chinese banks to “swap local-government bailout bonds for cash as a way to bolster liquidity and boost lending”.

The program will give banks access to long-term liquidity that can be used to provide additional lending to the farming, affordable housing and small business sectors, those seen as crucial for China’s prosperity according to policymakers.

The program, similar to the long-term refinancing operation (LTRO) programs offered by the European Central Bank, will enable commercial Chinese banks to swap local government bonds held on their balance sheet for low-interest, 3-year loans from the PBoC. This additional liquidity could then be used to fund new lending to sectors favoured by the government.

Should the issuance of local government bailout bonds continue to grow – which is likely should authorities expand the program beyond it’s CNY 1 trillion limit later in the year – the subsequent transfer of risk from local government to banks, and then banks to the PBoC, could well act to boost the economy in a manner far stronger than anything we’ve seen to date.

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