Further PBoC monetary loosening is in place

PBoC will expand a program that permits commercial banks to borrow from it using loans as collateral. It would include nine more cities and provinces, including Beijing and Shanghai, after it was launched in Shandong province and Guangdong last year. 

There are notable similarities between the nature of this program and the government's fiscal policy arrangements. First, the stimulative effects of this program would be targeted, because PBoC has control over who to lend to and how much to lend. This is consistent with PBoC's earlier "targeted" RRR cuts, as well as targeted easing on the fiscal front e.g., stimulus that centers on urbanization projects and shanty town renovation. Second, the loan application process would give PBoC access to detailed information on banks' asset quality and lending practices, helping it better assess credit risks. In the same light, local government bond issuance requires detailed disclosure of local governments' financial information, allowing the central government and the public to better gauge the health of local government finances. Third, the collateralized loan program would shift some risk from the banking system to the central bank. On the fiscal front, the CNY 3.2 trillion local government debt swap program also has the effect of mitigating banking system risks as swapped local government debt carries implicit government guarantees. 

Still more stimulus measures may be required to achieve the expansionary impact of keeping GDP growth between 6.5% and 7.0%. They are expected to exhibit familiar characteristics: measures are likely to be targeted; banking sector risks would be kept in check; and the government would play a direct role in the channeling of funds.