Expansion of MLF Guarantee Scope Expected to Boost China’s Financial Inclusion

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The Chinese central bank’s recent decision to expand the scope of accepted collateral for its medium-term lending facilities (MLF) is expected to have a major impact on the allocation preferences of commercial banks.

The People’s Bank of China recently announced that it would expand the scope of accepted guarantees for MLF to include lower-rated corporate debt, as well as some small business, environmental or agricultural loans, as part of efforts to shore up financial inclusion.

Analysts expect the move to boost the value of the bonds and loans that Chinese banks hold on balance sheets, and have a major impact on their allocation preferences.

“An appropriate expansion in the  MLF guarantee scope will help to resolve prevailing market risk,” said Shang Zhenyu (尚震宇), general manager of Zhongyou Securities, to Securities Daily

According to Shang the move will make it easier for small and medium-sized businesses to obtain financing, which in turn will drive adjustments to China’s economic structure.

Bloomberg economist Chen Shiyuan (陈世渊) said that the chief goal of the MLF guarantee expansion is to reduce financing costs for the real economy, and enable the financial sector to better support growth its growth.

In the wake of PBOC’s adjustment the value of relevant bonds and debt held by Chinese banks will increase, making them more inclined to allocate resources to these areas.

The move is also expected to reduce rates for affected bonds and loans.

According to Chen the chief impact of the MLF collateral expansion will be to achieve a structural adjustment in the allocation of financial resources, tilting them more towards small and micro-businesses, environmental undertakings and “three agriculture” enterprises.

Chen said that the move is not a signal that monetary policy will be loosened, particularly given the Chinese government’s ongoing focus on deleveraging of the economy.

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