SHANGHAI, May 22 (Reuters) - China's central bank has provide 300 billion yuan ($48.1 billion) to the China Development Bank (CDB) for re-lending to reconstruction projects of shanty towns, sources with knowledge of the situation told Reuters.
The People's Bank of China (PBOC) is channeling funds to the country's biggest policy bank to boost liquidity in the system and support growth.
"China Development Bank started receiving these funds at the end of last month for re-lending to shanty town refurbishment projects," an industry insider who spoke on condition of anonymity told Reuters, adding that the 300 billion yuan would be disbursed over time.
The central bank did not respond to faxed requests for comment.
In addition to injecting money into the system, the loans constitute another instance of targeted stimulus spending on infrastructure, following similar investments in railway construction announced earlier in 2014. Regulators prefer such forms of investment because they are efficient at delivering cash quickly, help maintain employment and at the same time serve long-term social goals.
The PBOC has allowed short-term interest rates to stay accommodative this year in the face of stuttering economic growth and weak demand. The central bank reinforced the message on Thursday morning when it allowed 120 billion yuan worth of maturing bond repurchase agreements to inject cash into the system during scheduled open market operations.
That constituted the largest weekly injection since January, and came even though the benchmark liquidity indicator, the seven-day repo contract has been in accommodative territory near 3 percent.
The PBOC has previously used re-lending loans to the CDB as a mechanism to inject controlled amounts into the system, said Julia Wang, Greater China economist for HSBC in Hong Kong, in a research note. CDB has been central to investment-led growth. The non-commercial bank issues loans for large infrastructure projects and companies' overseas expansion.
"Apart from the need to co-operate with fiscal policies, re-lending implies changes to the monetary base, and is one way to inject longer-term liquidity into the system."
Some are concerned that the central bank will have trouble maintaining control if it injects too much money that is not easily withdrawn.
"Right now the worry is that money intended for vinegar will be spent on soy sauce," said another industry insider, using a Chinese idiom implying that the money could be diverted from productive investment into unwanted investment.
However, traders in China's money market have said that so far the PBOC has proven adept at employing short-term instruments such as repos and reverse repos to move money in and out of the system for short periods of time.
Some economists, however, have argued that reliance on such intermediate tools will be insufficient to keep the economy on track, and have called for Beijing to cut reserve requirement ratios at Chinese banks, which would inject a massive amount of funds into the base money supply for a long period of time.
$1 = 6.2337 Chinese yuan Editing by Jacqueline Wong