Pledged supplementary lending or PSL is likely to be used in China to extend funding to affordable housing and shantytown redevelopment projects as the country's policymakers ramp up support for the economy and seek to stabilize the troubled real estate market, experts said.

PSL is a monetary policy tool to provide policy banks with low-cost and long-term funding.

The People's Bank of China, the country's central bank, may seek to support the real economy by further reducing interest rate levels, making better use of outstanding loans to facilitate economic restructuring and easing local governments' debt stress, experts said.

They made the comments on Monday after PBOC Governor Pan Gongsheng said in a weekend interview to Xinhua News Agency that the central bank will provide medium- to long-term low-cost funding support to "three major projects", including affordable housing.

The "three major projects" refer to the development of affordable housing projects, the redevelopment of shantytowns and the construction of recreational facilities that can be easily converted into emergency structures (like makeshift hospitals during epidemics).

The tone-setting Central Financial Work Conference in late October had urged quicker steps on the "three major projects" to build a new development model for the debt-laden real estate sector.

In the Xinhua interview, Pan said the PBOC will also improve the policy system of rental housing finance and work with other authorities and local governments to facilitate a steady and healthy development of the real estate market.

In an article published by People's Daily on Monday, Pan reiterated the central bank's intention to provide the "three major projects" with low-cost funding while preventing risks of the real estate market from rippling through other areas.

Experts said Pan's remarks signal that PSL will likely be used soon to support affordable housing and shantytown redevelopment projects.

"Given that PSL has functioned well in driving credit expansion in specific areas, it is necessary to use the tool to expand the financing channels for 'three major projects'," said Lou Feipeng, a researcher at Postal Savings Bank of China.

The PBOC may provide policy banks with low-cost, long-term funding via PSL so that the latter can use the funding to grant loans to affordable housing and other projects, Lou said.

The size of PSL funding may reach 500 billion yuan ($70.06 billion) to 1 trillion yuan, he said, citing his preliminary estimates.

Created in 2014, PSL was initially used to finance shantytown redevelopment, with policy banks pledging bond and credit assets with the PBOC for long-term funding. The PBOC injected 630 billion yuan via PSL in the fourth quarter of last year to support infrastructure investment, according to UBS estimates.

In the Xinhua interview, Pan said the central bank will also focus more on cross-cyclical and countercyclical adjustments and maintain reasonable credit and social financing growth.

Stressing the need to keep monetary policy prudent and manage aggregate money supply properly, Pan said the PBOC will encourage financial institutions to mobilize the financial resources that may be currently inefficiently deployed.

Wang Jian, an analyst with Guosen Securities, said mobilizing outstanding loans could mean that commercial banks may stop renewing some maturing loans and instead use the credit quota to extend loans to new clients — a process that would allocate more financial resources to areas like high-tech manufacturing and services sectors.

Pan said the PBOC will increase support for major national strategies, key areas and weak links. "Financing costs of the real economy will be lowered while maintaining an overall stable level."

Pan further said reform efforts will be deepened to further reduce the cost for businesses and households to lend, as the weighted average interest rate of new corporate loans came in at 3.82 percent in September, the lowest in history.

While China's financial risks are generally controllable, the PBOC will work to defuse risks of outstanding local government debt, control new debt strictly and provide emergency liquidity to regions with heavy debt burdens when necessary, Pan said.

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