(Bloomberg) -- People's Bank of China deputy governor Pan Gongsheng said the temporary loan-purchase plan announced Monday to support credit growth won't undermine any need to cut reserve ratios or interest rates, dismissing speculation the policy could reduce the room for more easing.
The plan to buy some loans from commercial lenders for a year is to make monetary policy more effective and is different from quantitative easing in nature and scale, Pan said at a press conference in Beijing on Tuesday.
PBOC Unveils $60 Billion Plan to Aid Small Business Credit
“The new tools don't contradict cuts to reserve ratios and interest rates,” Pan said, adding that the funds provided through the new program won't be rolled over after the year has expired.
The plan to use 400 billion yuan of relending funds to purchase un-collateralized loans to small and medium-sized firms is aimed at boosting banks' lending to those weak sectors and helping stabilize employment in the aftermath of the virus pandemic. Millions of Chinese are being thrown out of work as businesses shut down and the government has prioritized job creation before other policy goals.
The yield on China's 10-year government bonds jumped Tuesday, reaching its highest level since late February, amid worry that the new measures might be a partial replacement for a rate cut.
“The impact of the pandemic on the economy and society has exceeded expectations,” as firms take longer to resume production than previously expected, Pan said. “Monetary and credit policy must be strengthened under the current circumstances.”
He also advised banks to increase buffers and loan write-offs to improve their asset quality, which will be affected due to the economic slowdown.
Including 40 billion yuan to encourage banks to delay loan repayments, Monday's announcement adds another 440 billion yuan of the relending quota to the existing program of 1.8 trillion yuan for commercial lenders. The relending program is essentially a targeted funding tool to provide cheap base money to banks under the condition that the money will be used for loans to specific types of firms.
The funds will be offered to banks via an intermediary special-purpose vehicle, which won't charge interest on banks, making it effectively interest-free, according to the central bank.
©2020 Bloomberg L.P.
With assistance from Bloomberg
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