China's loan collateral tweak will ease 'asset famine', state media says

SHANGHAI (Reuters) - China's central bank's decision to lower the collateral requirement for medium-term loans will alleviate the "asset famine" pressure on the bond market, state media reported on Tuesday, citing a source.

The People's Bank of China (PBOC) said on Monday it would lower the collateral requirement for the medium-term lending facility (MLF) loan to increase the size of tradable bonds in the market.

The move comes amid a record-long rally in China's sovereign bond markets that has prompted repeated central bank warnings and measures to put a floor under falling yields and prevent a market bubble.

The balance of outstanding MLF loans now exceeded 7 trillion yuan ($962.44 billion), and the majority of the collateral pledged for the loans are government bonds and local government debt.

"A large amount of bonds will be released if financial institutions choose to sell long-term bonds after the change to collateral requirement, effectively alleviating the pressure of 'asset famine' in the bond market," the official Securities Times reported, citing a source close to the central bank.

Market participants believe the move will also help maintain an upward-sloping yield curve, which PBOC officials appear determined to maintain.

The PBOC told Reuters earlier this month that it had hundreds of billions of yuan worth of bonds at its disposal to borrow, which it could sell, part of a plan markets see as an effort to cool a powerful bond rally.

On Monday, China surprised markets by cutting major short and long-term interest rates, its first such broad move since August last year, signalling intent to boost growth in the world's second-largest economy.

($1 = 7.2732 Chinese yuan)

(Reporting by Shanghai Newsroom; Editing by Sam Holmes)