Goldman Sachs On The Late 2023 PSL Increase

The US Banks weighs in on the PSL increase in late 2023. It sees this, along with other policy measures, to provide long term liquidity support to the banking system. See below for details.

"Pledged supplementary lending (PSL) is both a monetary policy tool for the PBOC to inject long-term liquidity to the banking system, and an off-budget channel for the government to raise funding. PSL was originally designed to support the shantytown renovation program (SRP) during 2015-18, and recent media reports suggest it will likely be reintroduced to support urban village renovation and public housing construction. The latest PBOC data suggest PSL net increased by RMB350bn in December 2023, the first time since November 2022.

During the 2015-18 cash-backed SRP, PSL provided stable funding to the banking system and local governments to facilitate growth. We estimate PSL-backed SRP contributed 22% of new home sales in 2017, up from 4% in 2014, and it may have contributed more than 30% of property sales in low-tier cities during 2015-18.

We expect policymakers to scale up urban village renovation and public housing construction in coming years, and believe PSL is likely to be one of the major funding sources, although policymakers may not specifically announce a quota beforehand. If this materializes, it should help smooth the decline in property investment and reduce the drag to GDP growth, but the impact on property sales appears uncertain.

In our baseline, we had envisaged notable policy support from PSL-backed urban village renovation and public housing construction, which would help mitigate the property sector’s drag to GDP growth in coming years. On market impact, the likely PSL should help improve liquidity conditions and mitigate the fiscal stress for affected provinces and cities. Besides PSL, we expect the PBOC to leverage RRR cuts and other lending facilities (e.g., MLF, relending) to provide broad-based long-term liquidity to the banking system"