Chinese central bank stands accused of printing money just to buy stocks
PBOC fires "four arrow" to target the Chinese property market's woes.
Our briefing on critical economic and financial developments in China as of Wednesday, 9 October, 2024:
Former senior banking official makes haste to deny accusations that the Chinese central bank is simply “printing money to buy stocks” in a bid to prop up the A-share market.
A run down of the “four arrows” shot by the Chinese central bank that target the ailing property market.
Chinese central bank stands accused of printing money just to buy stocks
Leading Chinese economist Xiang Songzuo (向松祚) has joined the ranks of official figures making haste to deny reports that China's central bank will use its powers of money creation to buy up stocks in a bid to support the A-share market.
On 24 September, the People's Bank of China (PBOC) - which is the Chinese central bank, the China Securities Regulatory Commission (CSRC) and the National Financial Regulatory Administration (NFRA) unveiled a raft of ambitious monetary and credit measures for restoring the health of the Chinese economy.
On the part of PBOC, these included reductions to the required reserve ratio for Chinese banks that could unleash a further 10 trillion yuan in liquidity, as well as a 20 basis points cut to the policy rate that will help to further reduce lending costs across the financial system.
The move contributed to a surge in Chinese stocks on the final trading session just prior to the start of China's 1 October National Day, with the Shanghai index jumping over 8% and the Shenzhen index leaping more than 10%.
Out of the raft of policy measures unveiled by PBOC and its regulatory peers, domestic and foreign observers have focused in particular upon the launch of two new structured monetary policy tools, which observers have said will permit PBOC to "directly channel funds" into the stock market.
Xiang Songzuo, a professor at the Renmin University School for Finance, as well as the former chief economist of Agricultural Bank of China (ABC) and previously a deputy director at PBOC, says severe misconceptions abound over the nature of the new policies.
"Some observers have misinterpreted the two new policy tools as being a case of 'Mama Central Bank printing money to directly buy stocks,' or 'Mama Central Bank printing endless money to buy shares," Xiang wrote in a recent opinion piece.
"These interpretations are completely erroneous, severely mislead investors, and require clarification."
These two tools unveiled by PBOC that are the source of contention are:
The swap facility for securities, fund and insurance companies. The tool permits qualified securities companies, fund companies and insurance companies to use certain securities as collateral for obtaining liquidity from the Chinese central bank.
The share buy-back increase special re-loan. The re-loan is for the purpose of encouraging banks to provide loans to listed corporations and their key shareholders to either buy back or increase their holdings of stocks in such companies.
While these tools can support the equity market by providing liquidity to market participants, Xiang points out, however, that neither of them facilitate the direct purchase of stocks by PBOC itself.
"The central bank can only serve as the end lender, providing liquidity support to the financial system when required."
The re-loan, for example, involves the provision of funds to commercial banks by the central bank, not direct loans by the central bank to either listed companies or shareholders to purchase stocks.
"Those commercial banks must decide whether or not to make loans to listed companies or shareholders based on their own credit standards and assessments," Xiang points out.
Xiang further argues that the new policies will not lead to "money printing by the central bank" or a dramatic swelling of the base money supply.
"The swap facility isn't a direct provision of funds to the market, and does not expand the central bank's supply of money or its extension of base money.
"Qualified securities, fund and insurance companies must provide qualified assets as collateral to the central bank to strengthen their financing and investment capability, which means the use of a 'securities for securities exchange.'"
The Chinese Central Bank fires "Four Arrows" at the Property Market
On 24 September, the People's Bank of China (PBOC), being the Chinese central bank, unveiled a slew of monetary and credit policies that state-owned media has since referred to as its "four arrows" for targeting the woes of the country's ailing property market.
The four arrows fired by PBOC at the property market in September include:
1. The People's Bank of China Announcement on Improving Commercial Home Loan Rate Mechanisms (中国人民银行关于完善商业性个人住房贷款利率定价机制的公告)
Since August 2019, PBOC has sought to make the loan prime rate (LPR) - based upon a survey of the interest rates provided by Chinese commercial banks to their best clients - the chief benchmark rate for the country's financial system.
PBOC's hope was that the one year and five-year LPR would serve as the foundation for more market-based determination of interest rates at longer maturities.
Chinese mortgage borrowers have since complained about inadequacies in the prevailing model.
In the case of home loans, for example, mortgages rates are currently fixed at a certain number of basis points above the LPR for a set time frame.
According to critics, this system both fails to reflect either the creditworthiness of borrowers or changes to the interest rate environment.
In the case of the latter, it's led to a sizeable gap between rates on old and new mortgages in China, threatening to overwhelm the banking system with a wave of advance repayments.
In order to deal with this issue, the Announcement:
1. Permits greater flexibility for changing mortgage rates based on the LPR.
2. Cancels the minimum time frame of one year for the resetting of rates for outstanding mortgages.
According to PBOC's announcement, the move is intended to pave the way for Chinese banks to make widespread adjustments to rates for outstanding home loans before the end of October.
2. The "Notice on Optimising Personal Home Loan Minimum Deposit Ratio Policies" (关于优化个人住房贷款最低首付款比例政策的通知)
The Notice essentially serves to set a single nationwide minimum home loan deposit of 15%, for both first and second home loans. The move of standardizing deposits for both first and second home loans is noteworthy, given PBOC has long sought to make credit access more difficult and expensive for pre-existing homeowners, in order to stymie speculative property investment.
PBOC governor Pan Gangsheng points out, however, that the application of this standardized deposit rate will not be absolute, with some local governments in China given discretion as to whether or not to apply it.
"15% is only the minimum deposit ratio. Commercial banks may require higher deposits based on customer credit assessments, or the discretion of clients who wish to make greater deposits," Pan said.
"This is a market-based negotiation between commercial banks and their clients."
3. Increasing the support ratio of PBOC's 300 billion yuan in social housing re-loans from 60% to 100%
On 17 May, PBOC announced the establishment of the 300 billion social housing re-loan facility, for the purpose of "encouraging financial institutions to support state-owned enterprises to purchase unsold homes at reasonable prices, for conversion into allocated social housing."
The re-loans essentially provide commercial banks in China with access to credit from PBOC to fund home purchases by government entities subject to policy guidance by local authorities.
PBOC's latest decision to increase the support ratio from 60% to 100% essentially means that it is now willing to fully fund such purchases.
Research from the China Index Academy concludes that the move will drive housing acquisition by local SOEs, while reducing the cost of such purchases.
4. Two year extension of key property market alleviation policies
PBOC has also announced the extension of two of its key policies for stepping up the supply of finance to buyers on the ailing Chinese property market.
The "Notice on Extending the Timeframe for Certain Real Estate Finance Policies" (关于延长部分房地产金融政策期限的通知), issued by PBOC in conjunction with the National Financial Regulatory Administration (NFRA), targets two key policies in particular.
These are the:
"Notice on Effectively Performing Current Work for Finance to Support the Stable and Healthy Development of the Property Market (关于做好当前金融支持房地产市场平稳健康发展工作的通知), and the
"16 Financial Measures" (金融16条).
PBOC now plans to extend these measures from 31 December 2024 to 31 December 2026.