China's central bank is making a fresh move to lower financing costs and guide credit to longer-term investment.
The People's Bank of China (PBOC) said on Tuesday that in the first five months this year, it has provided pledged supplementary lending (PSL) of 263 billion yuan (42.9 billion U.S. dollars) to financial institutions to fund housing renovation projects. Outstanding PSL reached 646 billion yuan at the end of May.
The central bank has lowered the interest rate of PSL to 3.1 percent from 4.5 percent to support renovation projects and lower investment costs.
The PSL program, initiated in 2014, is designed to help the central bank better target medium-term lending rates and boost liquidity to specific sectors by offering low cost loans to select lenders.
Unlike interest rate cuts, providing PSL to select banks can be more efficient in guiding the flow of credit, said Zhong Zhengsheng, economist with Huachuang Securities. It would encourage lenders to grant longer-term loans for sectors such as infrastructure construction.
In a report to clients, Wang Tao, chief China economist at UBS, expected the PSL operation to continue speeding up in the second quarter and to exceed 1.5 trillion yuan this year.
The PBOC has managed to bring down short-term interbank lending rates with a series of open market operations, but longer-term borrowing costs remained high.
The benchmark overnight Shanghai Interbank Offered Rate (Shibor), which measures the cost that Chinese banks lend to one another, tumbled to a five-year low of 1.027 percent on Monday. However, the average one-year lending rates are still over 6 percent at the end of March, well above that in the United States and Japan, according to the central bank data.
The PBOC cut the benchmark interest rates three times in six months to bolster the economy, which slid to a six-year low of 7 percent in the first quarter.
Latest economic indicators pointed to continued weakness, boosting concerns that higher financing costs would add pressure on industrial companies that are suffering declining profits while contending with increasing debt burdens.
In its 2015 financial stability report, issued last week, the PBOC warned of a slowing economy and rising debt levels. It acknowledged the problem of high borrowing costs and said it would lower interest rates in a targeted fashion.
