December 15, 2017 / 4:00 AM / a year ago

China lifts pledge financing ceiling to prevent settlement risks

SHANGHAI, Dec 15 (Reuters) - China’s central bank announced on Friday new rules that will raise the ceiling of automatic pledge financing to lenders in a bid to improve efficiency and ward off risks in the country’s payment and settlement system.

In the so-called automatic pledge financing business, lenders who have temporarily depleted their reserves automatically borrow money from the central bank using bonds as pledge to meet settlement needs. Most such financing is repaid on the same day of borrowing.

The People’s Bank of China (PBOC) said that in addition to raising the financing ceiling for lenders, the type of bonds banks can use as pledge will be broadened to include local government bonds, while the rates charged will be uniform.

The rule comes as Beijing is redoubling efforts to crack down on shadow banking, while also seeking to prevent a liquidity crisis as lenders struggle to meet increasingly stringent rules.

Smaller lenders, the main target of Beijing’s crusade against shadow banking, are most at risk of a settlement crisis due to their small capital and reserve base.

Automatic pledge financing “by nature is a settlement facility arrangement, rather than a liquidity tool,” the PBOC said in a statement on its web site, adding it won’t have any impact on China’s base money, or liquidity in the banking system.

According to the new rules, effective on January 29 next year, the ceiling for automatic pledge financing will be raised from 2 percent to 4 percent of paid-in capital for state-backed lenders. For shareholding banks, the ceiling will be lifted to 10 percent from 2 percent, and to 15 percent from 5 percent for city commercial banks.

The rates PBOC charges for the business will be determined by the interest rate of PBOC’s standing lending facility (SLF). (Reporting by Samuel Shen and John Ruwitch; Editing by Shri Navaratnam)

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