Chinese Central Bank Expands Funding Support for Lower Grade Debt

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The People’s Bank of China (PBOC) is providing preferential liquidity support for banks to allocate more funds to lower-grade debt, as the country faces a record year of corporate bond defaults.

Internet rumours spread on the evening of 18 July that the Chinese central bank would provide additional medium-term lending facilities (MLF) to primary dealers in order to support lending and bond purchases.

Several sources have confirmed the reports to 21st Century Business Herald, with one banker stating that they had already received a directive from PBOC outlining specific amounts.

According to 21st Century the central bank’s window guidance is for the provision of MLF at a 1:1 ratio for debt rated AA+ and above, and a ratio of 1:2 for debt rated below AA+, on the condition that it fall within the industrial category.

Domestic observers say the move is intended to give support to lower-grade debt in China, which has come under heavy pressure given that 2018 is already on track to be a record year for corporate bond defaults.

The vast majority of defaulting bonds have been rated AA+ or below, however, with analysts concerned about whether an influx of funds from banks can boost the liquidity of low-grade debt.

As of 18 July there have been a total of 28 bond defaults in China this year, all of which have been rated AA+ or below with the exception of CEFC Shanghai.

This has prompted a rush for AAA-rated bonds and a mass selling of lower grade debt.

Li Chao (李超), chief macro-analyst for Huatai Securities, said that the move did not signal a loosening of monetary policy, but was instead intended to stay a deceleration in growth of total social financing via on-balance sheet lending and bonds.

China’s total social financing has slowed considerably since the start of 2018, at 9.1 trillion yuan for the first half of 2018, 2.03 trillion less than the reading for the same period last year.

Growth in the total social financing balance fell beneath the two digit threshold to 9.8%.

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