Head of China Research - Forsyth Barr Asia, Forsyth Barr Asia

David Millhouse

Head of China Research - Forsyth Barr Asia

Forsyth Barr Asia

Macroeconomics

China&rsquo;s central bank is considering taking a page from Europe&rsquo;s financial-crisis handbook to free up more credit as growth in the world&rsquo;s second-largest economy slows. The proposed strategy would allow Chinese banks to swap local-government bailout bonds for cash as a way to bolster liquidity and boost lending, said people familiar with the PBOC talks. One option being considered involves giving banks access to long-term loans with the aim of improving lending to sectors that leaders see as crucial for China&rsquo;s prosperity, such as farming, affordable housing and small and private businesses. To obtain the loans, Chinese banks would use bonds issued by local governments as collateral. That strategy is similar in nature to the LTROs used by the ECB, the people said. Starting in late 2011, the ECB doled out trillions of dollars in three-year loans through such mechanisms, providing access to cheap funds for struggling European banks.<a href="http://www.wsj.com/articles/china-central-bank-cuts-banks-reserve-requirement-ratio-1429436676" target="_blank">http://www.wsj.com/articles/china-central-bank-cuts-banks-reserve-requirement-ratio-1429436676</a>&nbsp;I do NOT expect this to be true (certainly not in any reasonable size) - recall the government actually denied a similar story in early March. That being said, we will unquestionably get more action from the government to help mitigate LGFE risks &ndash; please see below for more details.

China&rsquo;s central bank is considering taking a page from Europe&rsquo;s financial-crisis handbook to free up more credit as growth in the world&rsquo;s second-largest economy slows. The proposed strategy would allow Chinese banks to swap local-government bailout bonds for cash as a way to bolster liquidity and boost lending, said people familiar with the PBOC talks. One option being considered involves giving banks access to long-term loans with the aim of improving lending to sectors that leaders see as crucial for China&rsquo;s prosperity, such as farming, affordable housing and small and private businesses. To obtain the loans, Chinese banks would use bonds issued by local governments as collateral. That strategy is similar in nature to the LTROs used by the ECB, the people said. Starting in late 2011, the ECB doled out trillions of dollars in three-year loans through such mechanisms, providing access to cheap funds for struggling European banks.http://www.wsj.com/articles/china-central-bank-cuts-banks-reserve-requirement-ratio-1429436676&nbsp;I do NOT expect this to be true (certainly not in any reasonable size) - recall the government actually denied a similar story in early March. That being said, we will unquestionably get more action from the government to help mitigate LGFE risks &ndash; please see below for more details. 

CHINA MACRO:  ECB style QE rumour unlikely to be true - BUT expect more LGFE measures