PBoC may consider QE – ING

FXStreet (Barcelona) - With Chinese equities posting a rally after the release of soft data, Tim Condon of ING, notes that the news of PBoC buying local government debt support the climb, further adding that an asset swap of securities for central bank deposits is one of many definitions of QE.

Key Quotes

“The Shanghai composite was up 0.9% ahead of the release of the weaker-than-expected Jan-Feb economic data.”

“Financials led the rally on a story circulating on social media about the PBoC buying local government debt from banks. Banks have been major buyers of bonds issued by local government financing platforms (LGFPs).”

“The bonds carried low coupons because of the perception that they were guaranteed by local governments. Ministry of Finance reforms announced last October categorized local government debts and specified local governments’ responsibility by category.”

“The worry is that banks are holding a lot of LGFP debt that is actually NPL. To give some sense of magnitude, local corporates issued CNY1.6tr (c.$255bn at today’s exchange rate) of bonds in the last three years, much of which we assume was by LGFPs.”

“The most recent nationwide audit showed that as of mid-2013 local governments had CNY10.8tr of debt and CNY7.0tr of contingent liabilities.”

“There are many definitions of QE; two constants are that it’s an asset swap of securities for central bank deposits and that it raises asset prices – equities, bonds and foreign exchange.”