MNI EXCLUSIVE:PBOC Ready To Help As Wholesale Stress Hit Funds

     BEIJING(MNI) - The People's Bank of China stands ready to provide liquidity

as it monitors a credit shortage hitting non-bank borrowers such as securities

firms and funds, amid concerns that difficulties to meet wholesale debt payments

could trigger asset firesales and push up financing costs for the real economy,

government advisors and market traders told MNI.

     The PBOC has tried to soothe market jitters since its takeover last month

of troubled Baoshang Bank undermined previously widespread market confidence in

an implicit government guarantee of small banks' debt. Wholesale funding markets

have contracted and borrowing costs surged, as lenders reject small banks'

negotiable certificate of deposits (NCDs) offered as collateral by wealth

management companies and other non-banks, a trader at a big bank told MNI.

Offers in the 7- and 14-day repo markets have reached as high as 15%, the trader

said, although he noted that these prices came from small brokerages with poor

credit and were unlikely to be repeated for long.

     "The market is quite anxious now. If the situation gets worse, with

interbank lending rates staying high, and issuance of low-rated NCDs becomes

harder, some small institutions may not be able to repay or roll over interbank

debt, so they would have to sell off assets," a government advisor, who asked to

remain anonymous, told MNI. "We hope that won't happen, but it's possible."

     --DEFAULTS

     Some repo borrowers have already defaulted, according to a memo issued by

China's securities regulator after a closed-door meeting by officials on Sunday,

without providing more details.

     The PBOC provided CNY300 billion last Friday via rediscount and standing

loan facilities to support lending by small banks, the advisor noted, adding

that if the situation worsened the central bank would be prepared to take

targeted measures, such as increasing rediscount lending or cutting reserve

requirements. Targeted measures would be tailored to particular types of

borrowers, as more general easing could fuel speculation in stock and property

markets rather than help the real economy, government advisors said.

     "In addition to maintaining an adequate liquidity environment via monetary

tools, structural moves are necessary to support targeted institutions, so that

a single case can't infect the wholesale market and cause a liquidity crisis,"

the first advisor said.

     A cut in the PBOC's benchmark interest rates would be of relatively little

benefit to small businesses, which face high risk premia, the advisor said. A

cut in policy rates would be more practical, but the timing would have to be

right, the advisor said, noting that easier policy by the Federal Reserve

provided marginally more space for such a move.

     "I think the central bank will not touch policy rates before money market

rates go down with the help of plenty of liquidity, " he said, explaining that

the PBOC will not want to allow an advantage to big banks, which will have first

access to such funding.

     --EXPANDED COLLATERAL

     According to news website Caixin, a meeting Tuesday involving the central

bank, securities regulators and top banks and brokerages led to a promise of

bank financing support for nine leading brokerages and fund managers in return

for their backing of smaller brokerages. The central bank also introduced a

credit risk hedging tool last week for holders of NCDs issued by Bank of

Jinzhou, another small bank.

     "The central bank has expanded the range of collateral accepted against its

monetary tools in a bid to improve liquidity transmission, but creditworthiness

concerns obviously make it more difficult for the PBOC to reduce the volatility

in liquidity, and that's not something that's going to change soon," another

advisor specialising in monetary policy told MNI. It is crucial that the PBOC

keeps the situation under control, the advisor said, particularly as mid-year

assessments for borrowers would normally produce additional tightening in

liquidity.

     "The sudden shock from the [Baoshang] takeover has changed the rules of the

game in the interbank market. Market players have started to reassess risks,

which is an inevitable step towards building a long-term sustainable mechanism,

but the priority now is to prevent market turmoil, particularly when there are

uncertainties from the domestic slowdown and external conflicts," the second

advisor said.

     While the wholesale market stress has not yet affected real economy

financing costs, advisors said there was a danger that if it is allowed to

worsen it could make bond issuance and other funding more expensive.

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

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