PBOC may use new tools to prop up local govt bonds

New measures could include liquidity infusion through policy banks, say sources

The People's Bank of China, the central bank, is considering new monetary tools to shore up the local government bond market, which could see issuances of about 1.6 trillion yuan ($258 billion) this year, analysts said.

While the central bank may not directly purchase the bonds, it would still be present in the market with the targeted re-lending scheme, the sources said.

The PBOC may chose to inject liquidity through policy banks such as China Development Bank for debt swaps, Caixin magazine reported, citing an unidentified source.

That measure is separate from the widely expected Medium-term Lending Facility or Pledged Supplementary Lending, but in essence is targeted relending, with terms of longer than 10 years.

Last July, the CDB received a 1 trillion yuan PSL, allowing it to use loans as collateral to get funds from the PBOC. The funds were subsequently invested in social housing projects.

Last month the PBOC injected another $32 billion into the CDB, Caixin reported, which fueled expectations that last year's PSL game could replay, this time by extending the eligible collateral to local government bonds.

Ma Jun, chief economist at the central bank's research bureau, declined to verify the issue to China Daily, citing the sensitivity of the issue. He said such efforts would require cross-department coordination.

Ma last week denied that the PBOC would directly buy the bonds. Following his remarks, yields on bonds issued by policy banks rose by 10 basis points.

But the fact that he did not explicitly rule out the possibility of indirect purchases, fueled hopes of an "upcoming PSL".

The Finance Ministry had in March announced a 1 trillion yuan debt-for-bonds swap plan that would save local governments up to 50 billion yuan in interest payments a year.

However, Jiangsu province on April 23 delayed a 64.8 billion yuan bond issuance after failing to agree with banks on the issuance price.

This scenario could be repeated in other parts of China, because banks stand to lose money on low-yielding government bonds.