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Bank of America says PBOC's QE adds 12% to balance sheet but more stimulus needed to spur growth

Goola Warden
Goola Warden • 3 min read
Bank of America says PBOC's QE adds 12% to balance sheet but more stimulus needed to spur growth
Bank of America says PBOC's QE adds 12% to balance sheet but more stimulus needed to spur growth including rate cuts
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Bank of America (BofA) research says The People's Bank of China (PBoC) has expanded its balance sheet by nearly RMB5 trillion or 12% over the past 7 months, according to the latest data released by the central bank. This larger-than-usual expansion has led some to claim that China is now embarking on its own version of Quantitative Easing (QE) to stimulate the economy. 

The recent increase in the PBoC's total assets wasn't due to large-scale bond buying, but driven entirely by a sharp increase in the central bank's "claims on depository financial institutions", which record funds injected into the banking system via various monetary policy tools.

Three factors have contributed to increase in the PBOCs balance sheet, targeted relending, pledged supplementary lending (PSL) and minimum lending facilities (MLF) 

In terms of targeted relending tools, since 2H2021, the PBoC has rolled out a series of new relending tools to provide funding support for targeted areas, such as clean energy and technology innovation. As a result, the outstanding amount of relending tools has reached RMB4.3 trillion as of Dec-2023, up RMB374 billion in mid-2023.
For PSL front, the PBoC injected a total amount of RMB500 billion via PSL in Dec 2023 and Jan 2024, aiming to support the "three major projects" (namely social housing construction, urban village revamp and infrastructure for both normal and emergency use).

Meanwhile, the outstanding amount of MLF has jumped by RMB2.1 trillion since June-2023, as the PBoC injected more liquidity into commercial banks.

The effectiveness of quasi-fiscal policy could vary depending on the local governments' fiscal situation, BofA says. Some local governments who face dire fiscal strains probably won't have very strong incentives to tap into such funds, even as top decision makers urge more borrowing for the construction of "three major projects".

See also: China property crash is battering a niche pocket of ESG finance

According to BofA, this credit injection is likey to be muted. First, the targeted lending support so far is still small in size, especially compared with the size of the economy. The increase in targeting lending since the beginning of 2022 is only equivalent to 2% of GDP. During the current cycle, the 1-year loan prime rate or LPR has declined by only 25 bps since 2022. And, despite credit extension guided by the central bank, some funds are sitting idly in the banking system, due to weak credit demand and low risk appetite in the private sector.

"In our view, more broad-based monetary policy easing is still needed to revive credit demand. The PBoC needs to both expand the size of its lending programs and cut interest rates more aggressively if it hopes to support investment growth more effectively," BofA says. Hence it is expecting more interest rate cuts in 2H2024 especially if the Federal Reserve starts a rate cut cycle. "The PBoC is likely to remain reluctant to cut rates in the near term due to FX depreciation concernsm. Ultimately, interest rate reductions would be more effective in spurring credit growth, if accompanied by stronger fiscal support and better policy coordination," BofA points out.


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