"Fundamentally, we do not consider this to be materially different from how PBOC has managed China's base money supply in the past. The only difference is that the type of collateral used will now include new bonds once they are available, along with longer terms of liquidity provision," she said.
Wang said the expansion of PSL does not mean that China has run out of other means to increase base money supply, but the government chose to use PSL or other similar liquidity facilities due to a belief that they can deliver more targeted easing to desirable sectors.
Local governments also ramped up their own efforts to increase the appeal of their bonds. Authorities in at least five cities are accepting local-government bonds as collateral, Bloomberg reported on Wednesday, citing people familiar with the matter.
Governments require collateral when they deposit cash at competing commercial banks. Typically, only central government bonds qualify.
The Caixin report also said that officials at bank headquarters are unwilling to buy these bonds, but officials at local branches tried to persuade them out of concern over local governments' deposits, which is a main source of bank deposits.
Two researchers from the Institute of Finance and Banking under the Chinese Academy of Social Sciences said in an academic journal on Wednesday that the circumstance for issuing municipal bonds are far from mature, so the Finance Ministry should consider issuing special State treasuries instead.
Provincial authorities estimated they had 16 trillion yuan of direct debt by the end of 2014, a 47 percent jump from 18 months ago, an official with the ministry said earlier.
Debts falling due this year is estimated at 2.9 trillion yuan, or 4.2 percent of the country's GDP, the China International Capital Corp said in a recent report.
Central bank options
Standing Lending Facility
Introduced in early 2013, this is a regular monetary policy tool to improve liquidity management, meeting financial institutions' large amount of liquidity demand with relatively longer durations.
Short-term Liquidity Operations
Started in the fourth quarter of 2013 as a supplementary tool of open market operation. The PBOC will adjust the timing, duration and collaterals based on monetary policies, liquidity conditions in banking system, and money market rates.
Pledged Supplementary Lending
This is a collateralized form of on-lending facility that became effective in the third quarter of 2014. It allows the central bank to improve credit allocation through targeted liquidity provision.
Medium-term Lending Facility
MLF, introduced in September, 2014, is a monetary policy tool to supply base money over medium term, improve liquidity management, and guide market interest rates.
On-lending/Relending
Effective since 1984, this refers to the loans issued by the PBOC to financial institutions. It is used to adjust overall credit growth and improve credit allocation. There are four types of on lending, created to provide liquidity, provide credit support, ensure financial stability, and provide loans for special projects, respectively.
－PBOC, UBS
