The National Development and Reform Commission (NDRC) of China has allowed some local government financing vehicles (LGFV) to issue new bonds for the repayment of maturing debts yeasterday.
Reports are that up to 40% of the new funds raised can be used to repay old debt and the remaining to be channelled to ongoing infrastructure projects. The new guidelines follow the policy reversal in late May to allow LGFVs undertake additional borrowing to fund ongoing projects. In October 2014, LGFVs were prohibited from increasing debt levels.
Separately, the State Council has proposed to scrap the 20-year long 75% loan-to-deposit ratio (LDR) rule for banks. Some estimates are that this could free up CNY6.6trn (USD1.1trn) in new lending. However, the fact is that most banks are already operating well below this threshold, around an average of 66% as of Q1 2015. Furthermore, banks are reluctant to lend given the slowing economy, particularly to sectors facing excessive capacities.
This morning, PBoC conducted a CNY35bn 7-day reverse repurchase (repo) operation at a yield of 2.7%. This is effectively a liquidity and the first repo operation in two months. This helped the 7-day Shanghai Interbank rate to ease to 2.8% from last week's high of 3.5%, notes Commerzbank.
According to Commerzbank, the overall news flow and repo operation as part and parcel of the ongoing accommodative monetary policy stance and efforts to shore up lending and credit growth. For USD-CNY, it continued to hold steady at around 6.2070.
China's Vice Finance Minister Zhu Guangyao said at the conclusion of the US-China Strategic and Economic Dialogue (S&ED) that the CNY is at a reasonable level, and that currency reforms are still moving forward.
