MNI EXCLUSIVE: China Bank Recapitalisation Not Enough:Advisors

     BEIJING (MNI) - Moves by the People's Bank of China to boost lending by

recapitalising banks will have limited impact on credit expansion without more

fiscal stimulus and a partial rollback of rules imposed during a drive to limit

leverage, former central bank officials and government advisors told MNI. 

     Bank lending regulations and a crackdown on shadow banking should be

relaxed to ensure banks to expand credit sufficiently, said Sheng Songcheng, a

former head of the PBOC's statistics and analysis department. 

     "There are many regulatory restrictions on lending, while off-balance sheet

funding and shadow banking are also restricted," Sheng said, "The PBOC itself

cannot smooth monetary policy transmission." 

     Another former PBOC official, Wu Ge, who worked in the monetary policy

division, also told MNI that easing deleveraging rules would be more likely to

prompt banks to lend to riskier borrowers than recapitalisation. 

     "Strict controls on the property sector and local government funding

vehicles need to be lifted to some extent to stimulate credit," he said.

     --PERPETUALS

     After injecting trillions of yuan into the interbank market via reserve

ratio cuts and open market operations in January, the PBOC has now moved to

encourage banks to recapitalise. By creating a facility to swap banks' perpetual

bonds for highly liquid central bank bills, the PBOC hopes to make investors

more likely to buy the perpetuals, which count as capital, and thus make it more

attractive for banks to issue the securities in the first place. 

     Following the PBOC's launch of the CBS facility, Bank of China issued a

CNY40 billion perpetual bond, replenishing Tier 1 capital by 0.3%. According to

Great Wall Securities, 22 A-share listed banks need fresh Tier 1 capital, and

they calculate banks could add around CNY500 billion in additional capital via

perpetual bond issuance. 

     Using the 6.6% average leverage ratio listed banks reported in Q3,

replenished capital could support around CNY3.3 trillion in fresh credit

provide, Great Wall say. 

     --DEMAND STILL NEEDED

     But rebuilding bank capital may not trigger demand from creditworthy

borrowers in the real economy, Chen Daofu, deputy director at the Financial

Research Institute of the Development Research Center of the State Council, told

MNI. 

     Chen dismissed market speculation that the swaps will function as a

quasi-quantitative easing, although he admitted that they are, like the PBOC's

earlier targeted RRR cuts, an unconventional measure. "But if the economic

situation changes, a policy mix including QE could be an option," Chen said. In

contrast to QE, the swaps do not inject liquidity and the PBOC will not take

credit risk from the perpetual bonds onto its balance sheet, agreed Sheng. 

     "Even if the primary dealers use the bonds as collateral for PBOC liquidity

operations, including medium-term lending facilities, it would still be an

indirect operation by the PBOC. The dealers need to pay interest and the

facilities will mature," Sheng said, adding that the new facility will not cause

the PBOC's balance sheet to expand indefinitely as the swaps mature in three

years. 

     Yu Yongding, a former member of the PBOC's Monetary Policy Committee, told

MNI China had "lots of other options, particularly fiscal expansion," before QE.

The prominent economist and senior government advisor insisted China must

maintain its economic growth rate by using both fiscal and monetary policies,

but that fiscal policy should do the heavy lifting.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: MAQDS$,M$A$$$,M$Q$$$,MX$$$$,M$$CR$]