Updated: China Development Bank Cuts Off Funding for Shantytown Renovation

Update: 棚改政策调整！国开行全面上收棚改审批权

In the evening of the same day, the Information Office of the CDB responded to the 21st Century Business Herald that since this year, the Development Bank has strictly implemented the country's policy on shed change, and cooperated with local governments in compliance with laws and regulations to carry out shed financing reform work under the guidance of the relevant ministries and commissions of the State Council.

...The 21st Century Business Herald reporter verified from the National Development Bank office that the branch of China Development Bank suspended the approval of the shed reform project, and that the approval authority of the head office was true. The so-called “shed change” refers to the reconstruction project of urban dilapidated houses to improve the housing conditions for families with difficulties.

"Originally, most of our mid- to long-term project approval authority was in the head office, and it depends on the amount. Now it is said that the approval rights of the shed change project will all be received first, and the new project will basically be suspended for approval. However, the stock items that have already been released are still as usual." According to a person from the said country’s operating bank, “As for the approval in the future, it is still unknown.”

Another source pointed out that the shed change loan has not been completely halted, but because the China Banking Regulatory Commission recently reviewed it at the National Development Bank, the PSL approval authority of each local branch was temporarily recovered by the head office. After the head office's policy is clear, it will be issued normally. And as long as the project PSL that was included in the shed change plan at the beginning of the year is still in normal development, it will not be affected by this policy adjustment.

According to an analysis of the reporter from the 21st Century Business Herald by the above-mentioned National Bank of China, the approval of the shed reform project was suspended or related to the fiscal system's remediation of local government liabilities. The special fund for currency resettlement for shed change is mainly provided by China Development Bank, and the provincial-level financing platforms in each locality are responsible for the overall repatriation.

With one hand (MLF expansion and RRR cut) China giveth liquidity, and with the other (PSL) it taketh away. The bigger story is why the CDB head office took over PSL lending: local govt debt concerns.

Original post below:

One of China's strategies for reducing housing inventory in recent years was to renovate substandard housing. Bulldoze shantytowns and replace them with new development. This program has been ongoing for a few years, but now there's word that possibly out of concern for local government debt levels, the China Development Bank will no longer lend money for some government projects, halting lending through commercial and state-owned banks to local governments. According to this article below, originally from 21st Century Herald, the CDB has not yet answered reporters' inquiries.

iFeng: 国开行回收棚改审批权限？政府购买服务实质影响融资进展

According to the Deputy Minister of Housing and Construction Lu Kehua in an interview with reporters in 2017, the proportion of monetized resettlement in the country's shed change was 48.5% in 2016, an increase of 18.6 percentage points from 2015, and 250 million square meters of housing can be purchased from the market. There is currently no official national data for 2017.

A branch of a large state-owned branch of Shandong Province told a 21st Century Business Herald reporter on the 25th that at present, China Development Bank has not obtained relevant information on suspending and approving shed renovation projects. According to its understanding, the relevant shed change loan policies and quotas have not been greatly adjusted. However, the main variable is that, in order to regulate local fiscal liabilities, the financing of shanty-salvage projects with government procurement services is suspended.

“Whether it is the CDB or our commercial bank, the past contract for the government’s purchase of services can no longer be issued. We have issued a letter. Without this contract element, we can’t lend money. So we stop and wait for the next step on the government’s budget. There is no new trend.” The branch president also said that the essence of the issue is whether the government itself has the financial resources to support financing.

The stop may also be due to local governments hiding their debts:

Can be corroborated with this is that a person in Zhejiang Province's financial system said that this year, the Provincial Department of Finance "more than three years of shanty renovation is a disguised form of debt" identification policy, to a certain extent, affected the local shantytown financin, as a result, individual projects have been restricted from financing because they are not included in the list of provincial shantytown renovations. At the same time, due to the fact that the finance department, especially the Provincial Finance Department, has not yet finalized the policy of financing the shantytowns, a small part of the shed change loans will be placed on a wait-and-see or slower rhythm. It is expected that the demolition and relocation compensation will be affected in time and in full.

JRJ: 国开行:至5月发放棚改贷款4369亿 各项工作有序推进

The famous financial blogger Caoshan Stone said that the approval of the PSL (supplementary mortgage loan) was suspended and the head office was waiting for a new policy. Microblogging users said that this means that the shantytown renovation is completely halted. A person who is close to the CDB said that he had not heard about the suspension.

Some microblogging netizens said that the branches of Shanghai CDB and Shanghai have feedbacked on the normal issuance of PSL. And what I learned now is:

1. Most of the PSLs are still being issued, and the old quotas are still being issued.

2, the new credit assessment is more stringent, this specific means that according to the project approval, the frequency is to meet the conditions for credit, not a fixed frequency credit;

3, PSL's contract approval authority has got the head office to go.

Netizens also said that they had contacted the old leader of the Sichuan Housing and Urban-Rural Development Department. It was not a matter of stopping the sheds and changing the monetization. It was the pressure of shrinking psl capacity and the design of two new financing directions.

Base money delivery channels will change, and shed change will come to an end

From 2015 to 2016, the renminbi faced greater depreciation pressure. The central bank began to introduce MLF and PSL operations. The peak liquidity of the two types of operations released exceeded 7 trillion yuan (nearly 8 trillion yuan). To a large extent, he hedged the base currency of foreign exchange collection channels and maintained relatively stable market liquidity.

For the MLF, the central bank has expanded its collateral range on June 1st, so the MLF has more room to use. However, the monetization of sheds in the PSL and the problems it has brought have received more attention. As the PSL of the shed change monetization important placement mechanism, the new balance in the first quarter of 2018 exceeded 300 billion yuan, which is nearly double the first quarter of 2017. Since the beginning of the year, prices in the third and fourth-tier cities have continued to rise. However, since entering the second quarter of 2018, it can be seen that the new balance of the PSL has apparently dropped, and it is expected that the increase in the second quarter of 2018 will be basically the same as the previous year.

　In this case, since the depreciation pressure is fully under control and it is expected that there will be follow-up strike reduction measures during the year, the role of PSL as a base money channel will be reduced. The targeted reduction measures mainly focus on debt-to-equity swaps , financing for small and micro enterprises, and other issues. Therefore, in the process of launching PSL, real estate in the third and fourth tier cities was closer to the currency faucet; in the process of a new round of directional RRR cut, the real estate in the third and fourth tier cities was further away from the faucet, and the corresponding shed change boom Or will come to an end.

Back in 2014, ZH covered the launch of PSLs: Is This China's QE?

Shortly after we exposed the real liquidity crisis facing Chinese banks recently (when no repo occurred and money market rates surged), China (very quietly) announced CNY 1 trillion of 'Pledged Supplementary Lending' (PSL) by the PBOC to China Development Bank. This first use of the facility "smacks of quantitative easing" according to StanChart's Stephen Green, noting it is "deliberate and significant expansion of the PBOC's balance sheet via creating bank reserves/cash" and likens the exercise to the UK's Funding For Lending scheme. BofA is less convinced of the PBOC's quantitative loosening, suggesting it is more like a targeted line of credit (focused on lowering the costs of funding) and arguing with a record "asset" creation by Chinese banks in Q1 does China really need standalone QE?

Background on the renovation loans from the CDB: New Urbanization

(2) Supporting shantytown transformation focusing on shantytowns in urban areas and “villages within cities”. As of the end of December 2015, CDB granted an aggregate of RMB 1555 brillion of shantytown loans, of which RMB 750.9 billion was granted within the year, contributing greatly to the early completion of 5.8 million shantytown transformation units across the country. RMB 236.7 billion were granted for monetized resettlement, resulting in a reduction of about100 million square meters of existing commercial housing properties nationwide. Priority was given to shantytown transformation projects in coal mining subsidence areas, state-owned mines, forests, reclamation areas, resource-exhausted cities and areas with a high concentration of tier-3 enterprises in central, western and northeastern regions, with RMB19.4 billion of loans granted to shantytown transformation projects in mining subsidence areas in the Northeast. As a result, construction of all shantytown transformation projects in mining subsidence areas in Heilongjiang’s “four coal mining cities” commenced on schedule.