Just hours after we warned that it was time to start worrying about China’s debt default avalanche, and shortly after the PBOC lowered its credit quality restrictions for collateral, China offered its Medium-term Lending Facility (MLF) to inject CNY463bn (~$72bn) of liquidity.
As we detailed earlier, the recent blow out in Chinese corporate bond spooked none other than the PBOC, which last last Friday announced that it will accept lower-rated corporate bonds as collateral for a major liquidity management tool in a move that analysts see as designed in part to restore confidence in the country’s corporate bond market.
Specifically, the central bank said that it had decided to expand the collateral pool for the medium-term lending facility (MLF) to include corporate bonds rated AA+ or AA by domestic rating agencies. The central bank also added as collateral financial bonds rated AA and above with proceeds to support rural development, small enterprises and green projects, as well as high-quality loans supporting green projects and small enterprises, the PBoC said in a statement posted on its website.
The PBoC said the expansion of collateral would “help alleviate the financing difficulties of small companies and to promote the healthy development of the corporate bond market.”
CICC confirmed as much, writing in a note that “the expansion of collateral for MLF, to some extent, is intended to bolster confidence in lower-rated corporate bonds … and to avoid creating an apparent net financing gap which would impact the real economy.”
Translated: the PBOC is providing yet another backdoor bailout to China’s latest and greatest distressed sector in hopes of avoiding an avalanche of defaults as credit conditions become increasingly tighter as the PBOC hikes tit for tat with the Fed.
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Today’s MLF was offered at 3.3% -very marginally above the 3.25% one-year term rate for the last MLF in February saying it was “to ensure banking liquidity remains stable”
Notably, 259.5 billion yuan of MLF loans werer set to mature on Wednesday, so today 463 billion yuan really exposes the need for liquidity (rolling all the prior loans and an additional 203.5 billion yuan was required).
However, there was also a net withdrawal of open market operations of 180 billion yuan due to maturing repo agreements.
Which means the net liquidity injected today was 23.5 billion yuan (still around $3.6 billion).
While today’s PBOC intervention may delay the moment of reckoning for the world’s most indebted corporate sector, it will not eliminate it. One potential catalyst: Chinese companies have to repay a total of 2.7 trillion yuan of bonds in the onshore and offshore market in the second half of this year, and together with another 3.3 trillion yuan of trust products set to mature in the second half, the funding problems will get worse. As already more than eight high-yield trust products have delayed payments so far this year.
To be sure, Beijing will do everything in its power to avoid a default waterfall, but another emerging – pardon the pun – risk is that as Boyd concludes, negative sentiment towards Chinese corporates could become a major headwind for EM debt, even as the crises in Argentina, Brazil and Turkey appear to calm down, resulting in another significant capital outflow from Emerging Markets, and even more pained complaints from EM central bankers begging the Fed to halt its tightening, or else.
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