MNI EXCLUSIVE: PBOC May Reduce Easing Bias, But May Buy Bonds

--PBOC Easing May Slow As The Economy Picks Up

--But "Chinese-Style QE" May Support Government Borrowing

     BEIJING(MNI) - The People's Bank of China may reduce its easing bias in the

second half of the year as the economy picks up from its Covid-19 slump and as

it increasingly favours tools targeting particular sectors, although more cuts

in banks' reserve requirements and even bond purchases are possible to support

government borrowing, policy advisors and former officials told MNI.

     Two tools unveiled Monday by the PBOC intensified bond traders' conviction

that the likelihood of further rate cuts is decreasing, helping send the yield

on 10-year government bonds to 2.87% on Friday, the highest level since February

and up more than 30 basis points since the beginning of May.

     The central bank said it would use CNY400 billion of one-year relending

funds to purchase unsecured loans to small and medium-sized firms and would

provide another CNY40 billion to encourage banks to delay SMEs loan repayments.

The new tools will prompt more lending, draining liquidity from the bond market,

said Chen Daofu, deputy director at the Financial Research Institute of the

Development Research Center of the State Council. They also lower the need for

further cuts in reserve requirements and interest rates, he said, adding that

the easing bias in the PBOC's "prudent" monetary policy stance will be moderated

as the economy recovers.

     Growth should pick up to 3% in the second quarter, following the record

6.8% contraction from January to March, Chen said.

     Signs of a rebound in infrastructure spending, property and car sales have

also reduced bond market expectations of more aggressive easing, said Wu Ge, a

former PBOC official, noting that the central bank's recent operations have

focussed on providing liquidity rather than lowering lending rates.

     --"CHINESE-STYLE" QE

     Further easing, via cuts to reserve requirements and increased open market

operations, will be more aimed at maintaining favourable conditions for

increased government issuance, said Wu, now chief economist at Changjiang

Securities. Policy rates could still be cut if necessary, but the pace and

extent of easing would not be as great as seen earlier this year, he said,

adding that the PBOC would also be wary of allowing excessive expectations of

easing to build in markets, fuelling speculation.

     The government may sell about CNY8 trillion in bonds this year, both to

cover its fiscal deficit and to roll over maturing debt, noted Yu Yongding, a

former member of the PBOC's monetary policy committee, adding that the central

bank should cut reserve requirements, carry out open market operations and could

even buy government debt on the secondary market, in "Chinese-style QE."

     While the central banks' SME loan purchases, providing banks with

interest-free funding and earning them about 350 basis points of carry, will

boost risk appetite, credit provision is likely to remain relatively

constrained, said Lian Ping, director of the Industry Development Research

Committee of the China Banking Association. Lenders are unlikely to relax strict

lending criteria for unsecured loans at a time when many companies are

struggling, Lian said, while Wu noted that the soft demand both at home and

abroad for SMEs' products shows no sign of improving soon.

     The PBOC expects the CNY400 billion relending facility to prompt CNY1

trillion in fresh loans, adding to China's total CNY150 trillion in banks'

outstanding loans to companies.

     The central bank could cut reserve requirements this quarter or early in

the third quarter, said Lian, also chief economist with Zhixin Fund, although he

added that it could tighten its policy stance next year if the economy surges in

the second half of 2020, with growth reaching 7-8% per quarter, and if the

Covid-19 pandemic eases around the world. Policy makers will want to preserve

ammunition in case of future challenges, and will also be keen to avoid an

excessively fast build-up of leverage from overly easy policy, he said.

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

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