China to fine tune policy

The People’s Bank of China (PBoC) released a statement over the weekend stating that it may fine-tune its policies, which has recently been code for policy loosening. Yet, we don’t think the bank will cut rates anytime soon or inject huge amounts of money into credit markets to boost liquidity, as a loosening of policy would likely exasperate some financial problems facing the country, particularly with regards to ballooning property prices in some of China’s major cities, and threaten its efforts to rein in the country’s shadow banking sector.

Today the bank added that China’s banking system liquidity is at a reasonable level and that it will pursue prudent monetary policy. This is after China’s seven-day repo rate jumped 270 bps last week, while the PBoC remained on the sidelines. The market was expecting the bank to jump in, as it usually does in the lead-up to public holidays when demand for cash increases, and flood the market with liquidity. Yet, the bank remained on the sidelines, sending a message of sorts to China’s lenders that they must rein in credit expansion. This tells us that Beijing is focusing on fixing structural problems and relying on China’s banks to control credit expansion themselves as the bank limits the amount of money it directly injects into financial markets (usually through reverse repos, which the bank sells in an effort to boost liquidity in times of financial stress). However, the fact remains that in the event of a major credit squeeze, the PBoC has the tools needed to relieve pressure on financial markets.

Overall, we expect the PBoC to do what it does best – maintain prudent monetary policy. In other words, the bank will manage policy as needed to support the economy and manage growth. This currently involves ensuring that house prices don’t balloon out of control, which may have negative implications for growth this year.

Source: Forex.com

24.06.2013