MNI EXCLUSIVE: PBOC Should Beware Excess Stimulus: Advisors

     BEIJING (MNI) - The People's Bank of China must be careful to avoid

fuelling dangerous levels of financial arbitrage as it pushes banks to lend

more, government advisors told MNI.

     Additional loans will provide little boost to a slowing economy if there

are too few creditworthy borrowers able to put them to profitable use, Chen

Daofu, deputy director at the Financial Research Institute of the Development

Research Center of the State Council, told MNI.

     "Even the quantitative easing deployed by western countries after the

crisis only worked in a limited way, and benign credit expansion depends on new

economic drivers and supply-side reform," Chen said, "Until new growth drivers

appear, we should not try to boost credit demand, but should just smooth the

rate at which demand is slowing."

     The PBOC said on Thursday that a jump of aggregate financing in January,

and particularly a surge in short-term financing, was supporting the economy,

But it admitted that some of the growth may have been the result of arbitrage,

as companies issued short-term debt and then deposited the funds raised.

     According to the PBOC, new yuan loans surged to CNY3.23 trillion last

month, almost triple December's CNY1.08 trillion. This included issuance of

short-term discounted bills of CNY516 billion, some 15 times the level of a year

earlier. Market analysts say companies have been issuing short-term bills at

about 3% and then depositing the funds at 4%.

     The PBOC's statement came after Primer Li Keqiang made a rare warning on

Thursday that rapid growth in bank bill issuance and short-term loans could lead

to new potential risks.

     --CREDIT STIMULUS

     The PBOC has been trying to prompt more bank lending since the fourth

quarter of 2018, by encouraging lenders to recapitalise via issuing perpetual

bonds, cutting reserve requirement ratios, introducing targeted medium-term

lending facilities and providing incentives to lend to private small businesses.

     While major easing moves such as expansion of the PBOC's balance sheet or a

benchmark interest rate cut are not likely any time soon, there is still scope

for further reserve requirement cuts and for more targeted guidance for banks to

lower their lending rates.

     "There is still a lot of room for the PBOC to ease the pressure of banks'

liabilities via RRR cuts while swap facilities such as the MLF can provide

liquidity against increasing assets," said Peng Xingyun, deputy director of

National Institution for Finance and Development, noting that nominal loan

growth in January was 13.4%, far higher than GDP growth.

     "To improve the transmission of monetary policy, the PBOC has to address

two problems: it has to prevent capital from circulating inefficiently inside

the banking system and enhance the support for private sector funding," Peng

said. "These are both structural issues, so we need time to observe the impact

of the current credit easing policies."

     A benchmark interest rate cut would only come if other policies failed,

most advisors said. But Peng said it should be cut, as banks have to continue to

use the benchmark rate to set their real rates, even though bond yields have

been falling.

     Zong Liang, chief researcher at Bank of China, told MNI that banks had

relaxed lending criteria, upon encouragement from policy makers, but that

boosting loan volume depends on finding creditworthy companies to lend to. The

PBOC should not send a clear easing signal at a time of external uncertainties,

Zong suggested.

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

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

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