PBOC Shifts from Short to Long-term Instruments to Improve Financial Inclusion

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Analyst say the Chinese central bank’s recent open market operations mark a shift towards the increased use of longer term instruments as part of efforts to stabilise liquidity and shore up financial inclusion.

On 6 June the People’s Bank of China (PBOC) undertook 463 billion yuan in MLF operations, more than offsetting the 259.5 billion in instruments due on the same day, for a net increase in the outstanding MLF balance of 203.5 billion.

On the same day 180 billion yuan in PBOC repos matured, for a net withdrawal of 180 billion yuan, leading to an increase in the maturities of outstanding central bank instruments.

Not a week previously PBOC also announced a significant expansion in the scope of accepted collateral for MLF, to include lower-rated corporate debt as well as bank loans involving small and micro-enterprises and environmental undertakings, with the purported goal of increasing financial inclusion.

According to analysts the move indicates that the central bank is committed to the increased use of MLF to both stabilise banking system liquidity as well as increase the volume of funds channeled to certain neglected sectors of the economy.

Wang Youxin (王有鑫), a forex researcher from the International Financial Research Institute of the Bank of China, said to Securities Daily that the recent expansion of the MLF guarantee scope signalled greater use of the instruments ahead by resolving the problem of insufficient collateral.

PBOC open-market operations on Wednesday were intended to stabilise overall liquidity, as well as use the expansion in accepted collateral to improve financial inclusion.

“Looking at recent market opinion, enterprises generally indicate that the availability of financing has fallen,” said Wang. ” A very big reason for this is a weakening in the loan deriving function of financial institutions and a reduction in channels following the implementation of new asset management regulations, which has partially impacted support for he real economy” said Wang.

“For this reason, the central bank’s increase in MLF issuance can significantly ease the pressure of overall tight liquidity, as well as the pressure of insufficient available finance.”

Wang said that the withdrawal of repos from the market in tandem with the release of 1-year MLF is significant of PBOC’s plan to “lock in the short-term and release the long-term,” with the hope of providing more medium and long-term financing to small and micro-enterprises and the green economy.

Wang Qing (王青), a researcher from Golden Credit Rating International, said that PBOC was “locking in the short and releasing the long” as the middle of the year approached to maintain reasonably ample levels of liquidity.

At the same time the central bank was using expansion in the supply o fling-term funding to guide a slight increase in weighted capital costs, in order to restrict leveraged bond transactions.

Wang also said that the latest net increase in MLF has reduced the likelihood of another cut in the required reserve ratio in the near-term for the purpose of swapping out the instruments, while efforts to maintain liquidity should not be misread as a loosening of monetary policy.

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