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Green lending will spur trillions of yuan in credit expansion as the People's Bank of China uses a new policy tool to meet the long-term national goal of a pivot to a green economy, but the launch of the tool is also expected to reduce the short-term need for a reserve requirement ratio cut, policy advisors and market analysts told MNI.

The PBOC on Monday outlined a relending programme to banks at an interest rate of 1.75%, the lowest rate among its monetary tools, for up to 60% of funds financial institutions loan to approved green projects at rates equivalent to benchmark Loan Prime Rates, or LPR, (3.85% for a one-year loan).

Conservative estimates show the volume would be at least hundreds of billions of yuan to meet about CNY3-4 trillion of annual green investment demand, said Sun Tianyin, deputy-director of the Research Center for Green Finance Development at Tsinghua University.

According to PBOC's statement, the one-year relending can be renewable two times, which means, Sun said, the first sum would be three years in maturity and then the amount and supported sectors would be adjusted accordingly, see: MNI: PBOC Mulls A Financial Plan For China's Big Green Shift.

"It is the biggest substantial policy incentive in both scale and strength after years of development of green financing in China," Sun said.

The PBOC did not state a specific amount of funds available, but it is widely expected the volume would be around CNY 1 trillion next year. According to Huatai Securities, the annual issue of the facility would be about CNY1-1.5 trillion and leverage a total of CNY4-6 trillion investment per year, which may boost GDP growth by about 2 percentage points.


The targeted easing facility will significantly cut the lending cost of banks to support low-carbon projects, said an advisor familiar with monetary policy making. The advisor noted the so-called "loan-then-borrow" aspect as important because it will prevent liquidity flooding the money markets as the central bank subsidy kicks in after the loan is approved.

Getting credit into the market is urgent as the economy is slowing down, the advisor said. A RRR cut however could have had a restrained effect as too scattered, while targeted green tools could channel funding to sectors fostered by official policy, he continued.

This shows the PBOC will rely more on structural tools to supplement fiscal shortages and push for high-quality growth outlined by the government, he noted.

The advisor said the central bank may reduce open market operation funds, and its medium-term lending facility (MLF), based on the impact of the green lending to calibrate an "appropriate situation" for market liquidity.

For now, the advisor said, there are other ways to boost liquidity in the interbank market and expand credit, including the relaxation of loan controls to the property market.

The advisor added chances of other PBOC rate cuts are slim because the Fed expected to hike in the middle of next year, and the yuan may weaken more than desired if China eases at the same time.


For the broader money market as well, targeted lending is seen as reducing chances of an RRR cut in the short term, Zhang Lu, senior analyst at Pingan Securities.

Instead, Zhang predicted the PBOC would temporarily increase liquidity injections to meet a CNY1trillion MLF maturity expected to be rolled over next week, and pay maturing reverse repos in Q4.

Zhang said monetary policy would largely remain stable before the Central Economic Work Conference which usually happens at the end of December and sets a tone for next year's economic plans.

"The strict regulations on the property market and local government debt will make the PBOC focus more on its structural tools … but as the macro-prudential framework is getting sound, some across-the-board (easing ) measures would be taken next year," Zhang noted.

However an RRR cut next year cannot be ruled out in 2022 as economic headwinds are expected to get stronger in H1, the anonymous advisor and another official told MNI.

The PBOC may cut the RRR in January before the week-long China Spring Festival holiday when the country sees big cash demand., said Li Gang, senior fellow at the National Institution for Finance and Development.

Li agreed that the new tool will boost credit, but what makes it more relevant is that it will be a long-term facility allowing the PBOC to expand its balance sheet.


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