BEIJING (Reuters) - China's central bank on Friday sought to cool market expectations that it might flood the banking system with cash to help commercial banks buy local government debt, amid speculation that such steps could amount to quantitative easing.
The People's Bank of China will not inject a "specific amount" of liquidity into banks under a programme that lets commercial banks secure loans with local debt, said Pan Gongsheng, a vice central bank governor.
The PBOC's involvement in local debt swaps has fanned speculation China will launch its own quantitative easing (QE), although the central bank has denied such an intention.
The way local government debt can qualify as collateral "does not mean that the central bank will inject a specific amount of liquidity", Pan told a briefing.
The Ministry of Finance has allowed local governments to swap 1 trillion yuan (102 billion pounds) of maturing, high-interest local debt for new municipal bonds to reduce interest costs, but demand for such bonds has been weak.
To drum up buying by banks, China is set to let them use municipal bonds as collateral for borrowing, according to sources and an official document seen by Reuters.
This could boost a fledgling market Beijing hopes will help local authorities manage unwieldy debts.
Sources said banks will be able to use the bonds as collateral in the PBOC's repurchase agreement operations, as well as in standing lending facilities (SLFs), medium-term lending facilities (MLFs) and pledged supplementary lending (PSL).
To support China's slowing economy, the central bank has been pumping out short-term money via such policy tools, plus cutting interest rates and bank reserve requirements.
STRUGGLE TO SELL Local governments have struggled to sell bonds this year due to sluggish demand and unattractive yields.
On Tuesday, eastern Jiangsu province said it would restart on May 18 a delayed plan to sell 52.2 billion yuan ($8.41 billion) of bonds. It would be the first region to issue municipal bonds to swap debt.
Under "targeted" debt swaps to limit impact on market liquidity and borrowing costs, local governments and banks will negotiate debt interest rates and maturities, Pan said.
"Enthusiasm among financial institutions for such debt swaps is high. We believe the debt swap will be successful," he said.
The authorities will rein in risks in loan asset securitisation by avoiding complex products, drawing a lesson from the U.S. subprime crisis, Pan said.
China's asset-backed securitisation market has "huge potential" as outstanding securitisation products of 297.2 billion yuan at end-April were equivalent to just 0.3 percent of total loans, Pan said.
Reporting by Kevin Yao; Editing by Richard Borsuk