China’s central bank -- the People's Bank of China (PBOC) -- is planning to launch its own version of quantitative easing, the Wall Street Journal reported Tuesday, citing officials familiar with the matter. Under the new plan, reportedly named “pledged supplementary lending,” Chinese banks would be allowed to swap local-government bailout bonds for cash -- boosting liquidity and growth in an economy that recently experienced its weakest first-quarter growth since 2009.
The new tool, similar to the European Central Bank’s Long-Term Refinancing Operation (LTRO), is a loan given by the PBOC to commercial banks at below-market interest rates. The new strategy would seek to address these issues by allowing banks to use local-government bonds as collateral to take out low-interest loans from the PBOC, the Journal reported.
This strategy aims to lower borrowing costs and enhance domestic demand, thus boosting a slowing economy, which has prompted a flight of capital from the country. China’s GDP grew at 7 percent in the first quarter of 2015 -- its slowest pace since the initial months of the global financial crisis in 2009.
In a statement released earlier on Tuesday, China’s finance ministry reportedly urged local authorities to speed up the issuance of new municipal bonds. However, China’s commercial banks have become increasingly reluctant to purchase new bonds as the yields on offer are believed to be too low. As a result, China’s local governments are currently believed to be struggling with a debt load amounting to 16 trillion yuan ($2.6 trillion).