MNI SOURCES: China To Look To 3 Big Policy Banks For Stimulus

     BEIJING(MNI) - China will look to its three big policy banks to boost

support for investment as its economic growth fell to a record low in the third

quarter of the year, sources familiar with macro policies told MNI.

     "When economic headwinds get stronger, the policy banks, supported with

sovereign credit, will play a more active role in boosting infrastructure

investment, as they can raise capital by issuing long-term and low-interest

bonds," a source said, "Monetary and fiscal authorities are expected to allow

them more leeway to further expand credit."

     In September, the People's Bank of China restarted the Pledged

Supplementary Lending scheme it uses to inject funds into the three banks for

the first time in five months, providing a net CNY24.6 billion to take the total

outstanding to CNY3.52 trillion. Much of the money provided to the policy banks

via this facility has been used for shantytown development.

     China Development Bank, Agricultural Development Bank of China and

Export-Import Bank of China -- with total assets of CNY27 trillion as of the end

of 2018 -- have been at the forefront of all major Chinese stimulus packages.

     The policy banks could issue bonds to finance construction projects,

another source said. From 2015 to 2016, the CDB and ADB reportedly issued about

CNY2 trillion of bonds for government-backed infrastructure projects, assisted

by a Ministry of Finance subsidy that covered 90% of their interest payments.

The programme was eventually halted because it was feeding a rise in local

governments' implicit debt, but it could be restarted thanks to tightened

regulation on financial sector and local government implicit debt, the source

said.

     The banks could also provide loans to projects started with funds from

local governments' infrastructure-backed special purpose bonds, the source said.

Commercial banks have been reluctant to lend to such projects, due to concerns

over risk and low returns.

     Both sources stressed that policy banks should select projects only after

proper due diligence and that most of the finance provided for the projects

should come from private investors.

     Local government implicit debt, concentrated in local government funding

vehicles, could total CNY30 trillion to CNY60 trillion, according to both

official and unofficial think tanks, who consider it a potential danger to

central government finances.

     "Policy banks could also make efforts to deal with this debt. It has been

reported that the CDB has provided low-cost loans to some firms in order to help

keep this problem under control," the third source said, "The government needs

to step in, or a default will occur with spillover effects with significant

consequences for markets. That would buy some time for reform of

local-government financing vehicles."

     China's gross domestic product grew by 6% in the third quarter of 2019, the

lowest since records were first kept in March 1992.

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

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