BOFIT Viikkokatsaus / BOFIT Weekly 2018/30

Media reports assert that the People's Bank of China is using its medium-term lending facility (MLF) to provide collateralised loans to banks to be invested in bonds of non-financial corporations. Economics & finance magazine Caixin reports 1-to-1 MLF credit is available for purchase of bonds rated AA+ or higher and 2-to-1 for lower-grade bonds. In other words, PBoC is not buying corporate bonds directly to hold on its balance sheet, and commercial banks carry the risks. Collateral accepted for MLF loans was expanded in June to include corporate bonds with ratings of AA to AAA- (see BOFIT Weekly 23/2018).

Media reports say that the PBoC exercised its window guidance policy last week in requesting that commercial banks provide estimates of their planned corporate bond purchases for July. On Monday (July 23), the central bank granted 502 billion yuan ($74 billion) in new one-year MLF loans that Caixin claims were allocated for this purpose. Earlier this month, 189 billion yuan in MLF loans were issued to fund rollovers of maturing loans.

The rate on a one-year MLF loan is currently 3.3 %. On Monday, one-year AAA+ corporate bonds traded on the interbank market paid 4.0 %, and riskier AA- bonds 6.7 %.

Risks have emerged this year in the non-bank corporate sector with the increase in corporate bond defaults. The defaults have made investors particularly skittish about investing in high-risk bonds. At the same time, the yield spread for high and low quality bonds has increased. Companies are also finding it harder to access credit as the shadow banking sector has come under increased official scrutiny. China's Banking and Insurance Regulatory Commission (CBIRC) last week issued guidance to banks on "actively lowering" financing costs for small firms and improving access to financing. Large banks were requested to take the lead on this.