PBOC to drain cash from money markets
Mainland central bank prepares move to fight inflation as signs of economic recovery give it room to siphon liquidity from system
The People's Bank of China is preparing to reverse its liquidity strategy over the next two months, traders say, draining short-term cash from money markets to suppress resurgent inflation while leaving other rates in place to avoid cramping growth.
The change will test Beijing's strategy of relying entirely on short-term tweaks to the money supply without changes to long-term rates, which so far has shown mixed results.
"Quantitative management could arguably be the most effective monetary policy tool in China, because decades of planned economy has made local governments completely insensitive to the price of money," said Wang Haoyu, an economist at First Capital Securities in Shenzhen. "State-owned companies are only slightly better."
By "quantitative management", Wang was referring to a tactic where the central bank controls the price of money, manipulating its supply instead of using reserve ratios or interest rates to suck cash out of the market.
The change might startle investors in equity markets, which have slid in the past when the PBOC made unexpected drains, even when executed for seasonal reasons like holidays.
In addition, short-term rates remain relatively high after a spike last month caused banks to scramble for cash after the PBOC refused to inject cash for three straight sessions.
To calm market sentiment, a central bank official met privately with dealers to assure them there was still plenty of money, but she also implied that the rise in rates was due to "excessive leverage" by some market participants.
Dealers in the interbank market agreed with the official's take.
"The market is facing an overabundance of liquidity," said a senior trader at a state-owned bank in Shanghai.
He predicted the central bank would soon return to issuing forward repos, which drain funds for periods ranging from one to three months.
The surge of liquidity is driven by internal and external factors. One issue is the extension of the US quantitative easing programme, which keeps driving money into Chinese assets.
The year-end also typically sees money pouring into markets from the Ministry of Finance as it redistributes tax revenues.
Keeping credit flowing into the real economy while denying funds to property speculators and indebted state-owned firms has proven difficult in the past.
The credit crunch engineered by the PBOC in June was seen as an attempt to do so, and it did produce a pullback in shadow banking activity for a time.
But it also roiled domestic and global equity markets and rattled foreign investors. And non-bank loan forms of credit recovered, accompanied by data showing home prices leapt up by an average of 9.1 per cent nationwide in September, and consumer price inflation also rose 3.1 per cent.
But some economists say this time it is different: signs of recovery in manufacturing activity and services on the mainland in recent months mean Beijing now has more room to tighten up.