China raises ceiling of automatic pledge financing

SHANGHAI • China's central bank announced yesterday rules that raise the ceiling of automatic pledge financing to lenders, 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.

The People's Bank of China (PBOC) said that besides raising the financing ceiling for lenders, the type of bonds banks can use as pledge will broaden to include local government bonds.

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 are most at risk of a settlement crisis due to their small capital and reserve base.

According to the new rules, effective on Jan 29 next year, the ceiling for automatic pledge financing will be raised from 2 per cent to 4 per cent of paid-in capital for state-backed lenders.

For shareholding banks, the ceiling will be lifted to 10 per cent from 2 per cent, and to 15 per cent from 5 per cent for city commercial banks.

The rates PBOC charges for the business will be determined by the interest rate of PBOC's standing lending facility.


A version of this article appeared in the print edition of The Straits Times on December 16, 2017, with the headline 'China raises ceiling of automatic pledge financing'. Print Edition | Subscribe