China’s second cash crunch this year is revealing some of the risks behind pledges by the nation’s leaders to elevate the role of markets, in a country where policy makers are unaccustomed to detailing their intentions.
The central bank, which unlike counterparts in the U.S., Europe and Japan doesn’t schedule decisions on its main policy tool, saw the seven-day interbank repurchase rate rise for a seventh straight session yesterday even after it released more than $49 billion to selected lenders. The People’s Bank of China is “confused” on whether to target the volume of liquidity or influence the price of credit, Bank of America Corp. says.
Higher volatility in money-market rates, and difficulty in obtaining funds among some lenders, risk hindering economic growth already poised to slow to a 24-year low next year. While the PBOC has offered more public statements this time than in June, when it stayed silent for four days while rates jumped to a record high, lack of clarity remains on the pace of credit growth the central bank would be comfortable with.
“The markets are going to respond on the limited information they have and, guess what, people will assume the worst,” said Fraser Howie, Singapore-based co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.” “It comes back to the continual problem of secrecy and China being a naturally secretive and reclusive type of environment where they are not going to signal these things.”
The monetary authority, headed by Governor Zhou Xiaochuan, today conducted the first reverse-repurchase agreements in three weeks, auctioning 29 billion yuan ($4.8 billion) of seven-day funds at a 4.1 percent yield.
The overnight repurchase rate, a gauge of funding availability in the banking system, tumbled 117 basis points to 4.08 percent as of 9:20 a.m. in Shanghai, according to a weighted average by the National Interbank Funding Center.
The seven-day repurchase rate jumped 124 basis points yesterday to 8.84 percent, according to a daily fixing. The rate, which had more than doubled from 4.37 percent a week earlier, touched a record 10.77 percent in June.
The PBOC didn’t respond to a faxed request yesterday for comment on its communications and monetary policy.
The benchmark Shanghai Composite Index (SHCOMP) of stocks rose 0.6 percent at 10:15 a.m. local time, heading for the first back-to-back gain since Dec. 4.
President Xi Jinping last month unveiled the broadest policy reforms since the 1990s, including a pledge to make markets “decisive” in allocating resources and reduce the state’s role in the economy.
While the PBOC and government are trying to foster an orderly deregulation of borrowing costs and deposit rates, Bank of America says the central bank is confronting “serious challenges” from “grassroots” interest-rate liberalization stemming from a shift to alternative investment products.
The PBOC also has an “insensitivity to market reactions” that makes the central bank prone to make operational mistakes, Lu Ting, head of Greater China economics at Bank of America in Hong Kong, said in a Dec. 20 note.
Gross domestic product in the world’s second-biggest economy will expand 7.4 percent in 2014, according to the median estimate of 48 analysts surveyed by Bloomberg News from Dec. 18-23. That would be the slowest pace since 1990’s 3.8 percent.
The increase in interest rates will contribute to slower growth because it “will damage investment, particularly for highly leveraged companies such as property developers” and local-government financing vehicles, said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong.
The PBOC’s communications and transparency trail other central banks in the world’s six largest economies. The U.S. Federal Reserve, European Central Bank, Bank of England and Bank of Japan all announce decisions after scheduled meetings and hold regular press briefings where their leaders explain strategies and answer questions.
China’s central bank, by contrast, has no publicly available schedule for meetings or policy decisions, many of which are subject to approval from senior leaders on the State Council, or cabinet.
“Once again, a lack of communication from policy makers has added to uncertainty and probably made the situation worse,” Qinwei Wang and Mark Williams, economists at Capital Economics Ltd. in London, said in a Dec. 20 note.
The central bank first on Dec. 19 posted a message on its Twitter-like Weibo account, saying that it had injected an appropriate amount of liquidity and it would continue to provide support to selected banks “if necessary.”
The next day, the central bank published another microblog note that it injected more than 300 billion yuan over three consecutive days. The banking system’s excess reserves exceed 1.5 trillion yuan, a historically high level for this period of the year, the PBOC added.
In the context of the PBOC’s historical transparency, its efforts during this month’s interest-rate spike marked an improvement. The bank’s communication is “much better” than it was in June, when the PBOC continued to withdraw cash from the market amid a credit crunch, said Xu Gao, chief economist for Everbright Securities Co. in Beijing.
At the same time, the sparseness of the PBOC’s latest comments leaves analysts to find their own interpretations of the government’s strategy.
“The central bank wants to curb shadow banking a bit but clearly doesn’t want to hurt economic activities on the ground,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, who formerly worked at the ECB and International Monetary Fund. “It’s a hard balance.”
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