Beijing moves to dampen interbank volatility while keeping tight lid on speculation
PBOC turning less hawkish to minimise tightening risks
China’s central bank is turning less hawkish in its monetary stance to avoid risks caused by the multiplier effect of tightening measures imposed by different policy agencies as new data shows economic activity fell below expectations in April.
Tighter monetary conditions and stricter regulatory oversight have pushed market interest rates significantly higher since February. The yield on 10-year sovereign debt surged to a two-year high of 3.7 per cent last week.
However, higher rates are pushing up lending costs which are weighing on investment and economic growth.
Mainland Chinese industrial output rose 6.5 per cent in April from a year earlier, compared to 7.6 per cent in March, according to the latest economic data issued by the National Bureau of Statistics on Monday.
Retail sales increased 10.7 per cent in April, below a 10.8 per cent estimate by analysts polled by Bloomberg.
Fixed-asset investments excluding rural areas expanded 8.9 per cent for the first four months, compared to a median estimate of 9.1 per cent, according to Bloomberg.
Commercial banks have significantly reduced their off-balance sheet lending activities, particularly by reining in the asset management business, while some are raising deposit rates to attract capital to offset the liquidity tightening, said Chen Shujin, chief financial analyst with Hong Kong-based Huatai Financial.
“Regulators are determined to force financial institutions to deleverage by keeping the interbank liquidity tight, but some economists are saying interest rates are rising too fast, which could lead to potential systemic risks, or back fire in terms of achieving economic growth,” Chen said.
Under such a backdrop, Goldman Sachs said China’s central bank, the People’s Bank of China (PBOC), was shifting to “a more neutral tone”.
“[It is] probably in response to the rapid series of reported regulatory tightening by other policy agencies in the last several weeks and market worries about potential over-tightening,” said a research note issued by the bank on Sunday.
On Friday, the PBOC injected 459 billion yuan (US$66.5 billion) of fresh funds into the market via the Medium-Term Lending Facility (MLF), split 15:85 between the 6-month and 1-year windows.
Chen said the move was made to smooth out interbank volatility during the deleveraging campaign and to avoid a liquidity crunch by injecting medium-term liquidity, while still keeping a tight rein on short-term funding in a further effort to dampen speculative investment.
Tim Condon, head of research at ING Asia, said the April money and credit data already shows a sharp decline of shadow banking components in total financing.
Chinese banks extended 1.1 trillion yuan in net new yuan loans in April, central bank data showed on Friday, up from 1.02 trillion yuan in March.
However, trust loans, entrusted loans and undiscounted banker’s acceptances – major components of shadow banking activity in China – totalled 177 billion yuan in April, a huge drop from 753.8 billion yuan in March, according to Reuters’ calculations.
“We believe the PBOC is in tightening mode and will keep interbank liquidity sufficiently tight that banks get the message that they need to deleverage,” Condon wrote in a research note on Monday, while forecasting another 10 basis points rise this quarter in the rate the PBOC charges for liquidity through its open market operation.
Analysts with Goldman Sachs said the PBOC had called for better coordination of financial policy in its first quarter report. The central bank also highlighted concerns about the risk of over-tightening caused by intensive crackdowns by different policy agencies to squeeze shadow financing.
“In our view, following the measured moderation in interbank rates in the past week and solid bank loan data for April, the report’s language further strengthens the signal that the PBOC has incrementally turned less hawkish to factor in regulatory tightening by other policy agencies and reduce the risk of an excessively tight overall policy stance,” the Goldman Sachs note said.
In the first quarter monetary policy report, the PBOC suggested the need to improve coordination of financial policy as well as the “timing” and “rhythm” of regulatory measures. The report said this would help “stabilise market expectations” and “strike a balance between deleveraging and ensuring basic stability in liquidity conditions”.