The Central Bank Of China Will Not Be The Ultimate Buyer Of Local Debt.

Recently, the media reported that the Chinese government considered "3 trillion local debt replacement", replacing the short-term loans of local governments through long-term bonds, and the buyers of the bonds were the people's Bank of China. This means that China will launch "QE" with Chinese characteristics to inject liquidity into the economy and solve the long-standing problem of local debt. For this rumor, Zhu Guangyao, Vice Minister of finance, yesterday made an emergency rumor, saying that rumors about replacing 3 trillion local debt were groundless. The State Council explicitly approved that the scale of replacement is 1 trillion.

Beyond the scale issue, the key to deciding whether "local government debt replacement" is the "Chinese version of QE" is whether the Central Bank of China is the ultimate purchaser of local government bonds. Qu Hongbin, chief economist of Greater China in HSBC (HSBC), and his team think the answer is No.

First, Debt replacement It is real. The Ministry of finance has approved local governments to replace the high cost debt of 1 trillion yuan to low yield local bonds. About 2 trillion yuan of local government bonds expired this year. However, China's RMB banks can not become the ultimate buyers, first of all, it will cause moral hazard problems. Secondly, the central bank's behavior style is not as decisive as the European Central Bank, Mr Draghi.

HSBC pointed out that, from the perspective of reform, direct purchase Local bonds It will violate the goal of fiscal reform, and fiscal reform is aimed at constraining the lending behavior of local governments and making the lending process more transparent. In addition, the Central Bank of China has been lagging behind in response to the slowdown in economic activity, so far. currency Loose and cautious. The purchase of local bonds will represent a huge base money injection. From the perspective of the current monetary policy path, the possibility is very low.

In addition, unlike the developed countries, which have to resort to bond purchases under zero interest rates, the Central Bank of China still has much room to operate. At present, the benchmark lending rate is 5.35%, far from zero interest rate, and the deposit reserve ratio is still down to 19% after its reduction in February. According to HSBC estimates, a drop of 1 percentage points can release more than 1 trillion yuan of liquidity.

So who will buy local government bonds? Commercial banks and individuals. HSBC pointed out that first, commercial banks' demand for local government bonds (instead of existing local government financing platform bonds) will be very huge. Secondly, China's domestic savings rate is still very high, about 50% of GDP per year, and a large number of household savings belong to low yield bank deposits and other investment vehicles are relatively limited (financial products provide some choices, but the product is homogenous).