China Quietly Announces Quasi QE To “Keep Ponzi Scheme Afloat”

Friday, January 25, 2019
By Paul Martin

by Tyler Durden
Fri, 01/25/2019

On Thursday, to little fanfare, China’s central bank announced its latest liquidity injection scheme, which many analysts saw as a quasi Quantitative Easing program and a potential precursor to full-blown QE.

Just like QE in the US, where financial system liquidity was boosted by the Fed injecting reserves into banks in exchange for sales of Treasurys and MBS, which fungible liquidity was then used for a variety of purposes including directly investing in risk assets as the JPM London Whale fiasco demonstrated, the PBOC announced that it will allow China’s primary dealers to swap their holdings of perpetual bonds for central bank bills, and directly use those bonds as collateral to access certain PBOC liquidity operations.

By directly intermediating in the market, and effectively backstopping securities issued by local banks, this measure will increase the appeal of perpetual bonds to be issued by banks making them riskless for all intents and purposes, which can then be used to bolster capital cushions and thereby help relax a key current constraint on credit supply.

In other words, the PBOC just unveiled a roundabout way of injecting even more “risk-free” liquidity directly into the system, or as Rabobank’s Michael Every (more below) writes “Chinese banks, desperate for cash to keep the Ponzi scheme afloat, can issue perpetuals that nobody in their right mind would want to hold; and the PBOC will swap them for its bills.”

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First, some background: In December, China’s financial authorities permitted banks to issue perpetual bonds as a way to bolster their capital base, and on Thursday Bank of China, the country’s fourth largest lender, launched the first ever batch of perpetual bonds – which are the functional equivalent of preferred equity as they never have to be repaid – issued by Chinese banks, with an officially approved quota at 40 billion yuan and yielding 4.5%. These bonds count toward banks’ (non-core) tier 1 capital, thereby boosting the bank’s capital cushion and allowing the bank to issue more loans into China’s increasingly cash-starved system.

Why did Beijing take this aggressive step? Because as Goldman explains, banks’ increased consideration of their capital cushion had weighed on monetary policy transmission and loan extension. So, by adding to the banking system’s capital buffer, the issuance of perpetual bonds should in turn help ease a main current constraint on credit supply.

But that wasn’t enough, and just to make sure there is sufficient demand for “perpetual bonds” issued by banks, the PBOC launched the Central Bank Bill Swap (CBS), which just like QE, is an asset swap where the central bank injects high powered liquidity to backstop bank balance sheets, enabling them to pursue riskier credit transformation operations, in this particular case, issue more loans with the intention of reflating the system.

The Rest…HERE

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