It’s serious: China central bank squeezes credit again in money market
The central bank’s tapering of monetary easing, and Beijing’s crackdown on financial irregularities, are sending jitters through the country’s markets
China’s central bank continued its hawkish approach by skipping open market operations on Friday , pushing up bond yields and triggering a sell-off in stock markets.
The tapering of monetary easing by the People’s Bank of China, along with Beijing’s crackdown on financial irregularities, are sending jitters through the country’s financial and commodity markets, fanning fears that China’s monetary authority is sowing the seeds of financial disarray and turmoil.
As the Federal Reserve has made it clear that it will continue to raise interest rates earlier this week, China’s central bank is under pressure to accelerate “deleveraging” in the financial sector. At the same time, as PBOC has become less generous in providing cheap funds, signs of financial stress are becoming apparent.
The central bank’s decision not to injecting fresh liquidity in the interbank market, on a day when 60 billion yuan (US$8.7 billion) in reverse repos matured, meant that it was draining funds from the money market in addition to the net 805 billion yuan PBOC had taken from money markets so far this year. Chinese stocks plunged to a three-month low on Friday while 10-year government bond yields have risen by 90 basis points since October 2016.
“The deleveraging and tightening bias is evident, as the economy is still expanding and financial risk controls are being emphasised by the top leadership,” Guo Tianyong, a professor at the Central University of Finance and Economics, said.
Beijing is trying to get rid of its “overreliance on debt in the past decade” to reduce risks in the financial system, he said. “Such tightening will be long term,” Guo added.
The central bank’s gradual shutdown of the credit valve comes as Beijing’s financial watchdogs have enhanced checks on shadow banking activities since late 2016. PBOC itself is drafting a unified regulation to supervise asset management products.
The China Banking Regulatory Commission under its new chairman Guo Shuqing has initiated a “regulation storm” in the banking industry, telling banks to clean up their balance sheets and to stay away from dodgy deals with non-bank financial institutions.
Wang Tao, chief China economist with UBS Securities, said the government’s doubled efforts to regulate the financial industry “contributed partly to recent bond and equity market jitters”. She said that high pressure from regulators may persist “if not strengthen further”.
President Xi Jinping has made financial risk management a high priority for 2017 with a top leadership reshuffle taking place later this year. Xi held a Politburo meeting late last month to order stricter financial regulation, and in an extraordinary move, he convened China’s top financial regulators, including the central bank governor Zhou Xiaochuan, in a separate meeting, demanding vigilance against risks.
At the same time, as each regulator scrambled to answer Xi’s call, tightening measures from various departments – including the central bank, as well as banking, securities and insurance watchdogs – have become uncoordinated and could create fresh risks, analysts said.
The securities regulator has revised regulations governing securities, mutual funds, futures and corporate debt and increased requirements for risk control in recent months. The insurer watchdog issued circulars to discourage “irrational” expansion and merges and acquisitions, while its former chairman, Xiang Junbo, was placed under a disciplinary probe.
“The stricter supervision from various financial regulators coupled with monetary tightening could lead to a stampede in the bond market,” Deng Haiqing, an economist with local brokerage Jiuzhou Securities wrote in a note.
“It may see a repeat of the tragedy of the 2015 stock market rout or even trigger a flurry of corporate defaults.”
Guo, the professor, agreed that “good intentions” from regulators needed to be better coordinated.
Tim Condon, economist with ING, expects such fears to be short-lived. “The PBOC has learned from the June 2013 [credit crunch] episode when the introduction of measures to curb the growth of shadow banking caused the interbank market to seize up.”
But Condon added that 2017 might be “a good year for China’s economy but a not so good year for investors in China’s financial assets”.