MNI SOURCES: PBOC Concern RRR Cuts Send Wrong Signal: Source

--PBOC Enlarges MLF Collateral Range; Impact Ltd

     BEIJING (MNI) - The People's Bank of China's move Friday to increase the

collateral range for its medium-term lending facility loans was a liquidity

operation, used because a further reserve requirement ratio cut could send a

mixed message to financial markets, a source at the People's Bank of China told

MNI Monday.

     "The RRR cut is indeed a cross-broad way to release liquidity, but it would

send too strong signal for easing, particularly when stabilizing leveraging is

still the priority for policymakers," the PBOC source said

     "The (expanded MLF collateral) operation is to inject liquidity, since some

banks have inadequate MLF collateral, which were usually high-rated bonds," the

source added.

     Financial markets were abuzz late Friday that that the PBOC would cut the

RRR to let banks, allowing banks to refinance existing MLF loans, as it did in

April.

     However, the RRR cut did not occur, with the near-term prospect of cut now

decreased as Friday's move to enlarge the MLF collateral range suggests the

central bank is still treating MLF loans as an important policy tool, indicating

they are unwilling to see the outstanding MLF loans falling too rapidly.

     --INCREASED COLLATERAL BUCKET

     The PBOC's enlarged MLF collateral range now includes lower rated corporate

bonds, and the move is aimed at helping to direct more credit into the real

economy, alleviating corporate funding pressures.

     The PBOC previously accepted only China Government bonds, policy bank

bonds, local government bonds and "AAA" rated corporate bonds as collateral for

MLF loans, but now the PBOC will accept "AA+" and "AA" rated corporate bonds,

green bonds, micro and small-sized enterprise bonds and agricultural bonds,

along with micro and small-sized loans and green loans as collateral.

     --SUPPORT FOR REAL ECONOMY

     The PBOC's move will direct financial institutions to issue more credit to

micro and small-sized enterprises and to the green economy in order to alleviate

the funding difficulties for micro and small-sized companies, the PBOC said on

its official website.

     --LIMITED IMPACT

     However, the impact of the new move is likely to be modest.

     At present only 48 banks (a relatively small amount compared with the more

than 3,000 banks in China) have been selected as primary dealers eligible to

apply for MLF loans. 

     The primary dealers mainly consist of big banks, not lacking MLF

collateral, suggesting the potential impact on liquidity will be minimal. On the

other hand, most small banks, the main fund providers for micro and small-sized

companies, are not eligible dealers and cannot apply for MLF loans.

     That means the most likely result of the PBOC's move is to encourage

eligible small banks to apply for more MLF loans.

     Moreover, what seems to be preventing banks from purchasing more low-level

corporate bonds and issuing more loans to private companies is mainly rising

credit risks, rather than liquidity concerns. As the PBOC's new measure will not

help to solve credit risks, it is unlikely to solve refinancing problem.

     The move could signal that the PBOC is paying more attention to the current

refinancing and default problems, suggesting more structural measures could be

taken in the future.

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

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