PBOC’s Attempt to Exit Crisis Mode Faces a $500 Billion Test

The People’s Bank of China faces a $500 billion problem this month as it seeks to slow its stimulus to the economy, which looks to be recovering faster than expected from the coronavirus slump. China’s banks will need to find about 3.5 trillion yuan ($501 billion) this month to repay loans and absorb government debt issued to enable higher spending, according to economists’ estimates.

At a time when the PBOC is trying to chart a path out of coronavirus crisis measures, that leaves policy makers having to calibrate their cash injection carefully so that lenders can buttress the fiscal policy effort and roll over their debt. Too little and higher interbank rates will undermine the recovery; too much and the specter of faster debt growth rises again.

The PBOC will be “more conservative” in cutting interest rates and banks’ reserve ratios in the second half, but keep supplying short-term funds to banks, according to Ming Ming, head of fixed-income research at Citic Securities Co in Beijing. “Aggregate easing tools will be shelved, while tools directing credit to the real economy will stay.”

Proactive fiscal policy needs accommodation from monetary and regulatory policy to avoid crowding out private lending, Li Zhennan, an economist at Goldman Sachs Group in Hong Kong, wrote in a report. “The PBOC needs to avoid an over-tightening that jeopardizes the growth recovery, by keeping liquidity relatively supportive to avoid further decline in bond issuance.”

PBOC’s Attempt to Exit Crisis Mode Faces a $500 Billion Test, Bloomberg, Aug 5