Last month, the People’s Bank of China injected almost $50 billion into policy-oriented lenders.

The media suggests that the central bank of the mentioned Asian country is currently increasing the volume of financing for infrastructure and real estate projects.

The outstanding amount of the People’s Bank of China’s promised program of pledged supplemental lending secured by financial institutions implementing policy increased to 3.25 trillion yuan ($456 billion) at the end of December from 2.9 trillion yuan in the previous month. The relevant information is contained in the statement of the central bank of the Asian country, released on Tuesday, January 2. The net injection of funds worth 350 billion yuan was the largest increase using this instrument since November 2022.

The program of the People’s Bank of China for pledged supplemental lending is considered an impact mechanism, the use of which will allow the government of the Asian country to improve the situation in the real estate sector, which is in a state of crisis, and stabilize economic growth. The markets expected that the financial regulator would direct funds to stimulate the building of public housing. Experts said that this action could help mitigate the decline in real estate values that have been observed for several years. This trend is a negative circumstance that reduces the level of consumer confidence.

In November, the media reported that the Chinese authorities intend to gradually provide 1 trillion yuan of central bank financing to support programs aimed at building affordable housing and reconstructing urban villages. Officials were exploring the possibility of using the People’s Bank of China’s pledged supplemental lending program or special loans for appropriate purposes.

Xing Zhaopeng, Senior China Strategist at Australia & New Zealand Banking Group Ltd., says that the specified program of the financial regulator is the most direct and effective way to transfer funds to the economy. According to the expert, this is a very important tool for the economic system of an Asian country. Xing Zhaopeng noted that the positive effect of the pledged supplemental lending program will grow if its financial volume reaches 1 trillion yuan. The expert also says that this tool can replace some other forms of incentives.

Xing Zhaopeng estimates that the People’s Bank of China is unlikely to reduce the required reserves of financial institutions in the first quarter of 2024. The expert explains his point of view on this issue with abundant cash injections through the pledged supplemental lending program and one-year policy loans.

Xing Zhaopeng predicts that China’s official budget deficit will be 3% in 2024. At the same time, the markets expect that the corresponding indicator will be fixed at more than 3.5%. The expert noted that the funds provided under the pledged supplemental lending program can be described as quasi-fiscal calculations at the expense of the official budget of the Chinese government.

The mentioned program of China’s financial regulator has a controversial history. This tool was actively used in the period from 2014 to 2019. During these five years, the financial regulator’s program stopped the decline in housing prices, but at the same time inflated cost bubbles in the relevant market. Some experts have characterized the use of the instrument from 2014 to 2019 as so-called helicopter money or Chinese-style quantitative easing.

At the end of 2022, there was a short-term use of the pledged supplemental lending program. This decision was made to support state-owned banks such as the China Development Bank to provide financing for infrastructure projects. The total volume of money allocated at the end of 2022 amounted to 740 billion yuan.

The Development Bank of China is one of the strategic lenders of the Asian country, whose activities are more determined by the priorities of the government, rather than the desire to achieve profitability. Last month, this financial institution provided a loan for the implementation of a project to build affordable housing in the southeastern province of Fujian. The media reports that in this case, the Development Bank of China has committed a total credit line of 202 million yuan.

The interest rate under the additional lending program as of the end of September was 2.4% in China. This indicator is lower than the one-year policy rate and the benchmark lending rate of banks.

As we have reported earlier, China’s Biggest Banks Lower Deposit Rates.