China urges banks to ramp up government bond purchases

Regulators may scrap the 20% reserve requirement.

China’s financial regulator is reportedly planning to incentivise banks to increase their local government bond holdings by removing the debt’s risk weighting requirement, reports Caixin Global and South China Morning Post. 

Under current banking laws, lenders are required to hold reserves equal to 20% to protect against possible default of provincial and municipal debt.

Scrapping the cost hurdle will free up funds and make it more attractive for banks to ramp up their bond purchases, according to state media reports. The move means that local government bonds will stand on the same regulatory footing as bonds sold by the Ministry of Finance and the official China Development Bank, according to SCMP.

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Beijing has so far budgeted the sale of $196.79b (CNY1.35t) in local special purpose bonds in 2018 to be used to fund local infrastructure projects.

However, local government bond sales have been largely muted as a result of the government’s widespread crackdown on financial sector risk with credit rating agency Moody's estimating that the China's shadow banking assets have since plummeted from $9.16t (RMB62.9t) in end-2017 to $393.40b (RMB2.7t) in the first half of 2018.