China’s tightest credit conditions since a record cash crunch in June are prompting global investors to call for greater transparency from the central bank in the world’s second-largest economy.
The benchmark seven-day repurchase rate climbed 85 basis points to 5.05 percent in October, derailing a stock market rally and driving the one-year government bond yield to a record high. In June, the Shanghai Composite Index of shares sank 7.7 percent after the repo rate touched an all-time high of 10.77 percent. Then, as now, the People’s Bank of China said it was pursuing a “prudent” monetary policy even as it suspended cash injections into the banking system.
“The fundamental opaqueness of monetary policy making hasn’t changed since June,” said David Loevinger, Los Angeles-based emerging-markets managing director at TCW Group Inc., which oversees $128 billion in assets. “We don’t know who makes these decisions and how they’re made. Investors will demand a premium for investing in more opaque markets.”
China’s money markets have become more volatile as policy makers seek to defend a 7.5 percent economic expansion target while cracking down on excessive growth in lending and property prices. It isn’t clear what the central bank’s goals are and what role these play in monetary policy, said Loevinger. Standard Chartered Plc said clearer communication is needed to stabilize market expectations.
The Chinese central bank’s most recent official statement was on Oct. 16, when it signaled tightening by saying it sees pressure for faster credit expansion from the Federal Reserve’s decision to hold off on reducing stimulus, the trade surplus and capital inflows. The PBOC didn’t respond to a fax requesting comment yesterday on its policy stance.
The central bank suspended sales of reverse repos on Oct. 17, after offering seven- or 14-day contracts at twice-weekly auctions for more than three months. The cash injections resumed this week, adding 29 billion yuan to the financial system.
The benchmark money-market rate slid 108 basis points since Oct. 30 to 4.6130 percent as of 11:21 a.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. This came after the monetary authority conducted 16 billion yuan ($2.6 billion) of 14-day reverse-repurchase agreements at a yield of 4.3 percent yesterday. That’s less than the 48 billion yuan auctioned at 4.1 percent on Oct. 10, when the contracts were last issued.
“They’ve been sending out mixed signals,” said Becky Liu, a senior rate strategist at Standard Chartered Plc in Hong Kong. “On the one hand, they show a willingness to support, which means a repeat of the June crisis is definitely not happening. On the other, they actually confused markets” by allowing rates to rise.
China’s second cash crunch of the year comes just before a Communist Party meeting that will set the nation’s policies for the next few years. The leadership will consider “unprecedented’’ economic reforms at the Nov. 9-12 plenum, Politburo member Yu Zhengsheng said last month. The meeting will study measures proposed by the State Council’s research arm, including liberalizing interest rates and making the yuan a major currency for international settlement and investment within 10 years, the official Xinhua News Agency said Oct. 27.
As cash conditions tightened, the yield on the nation’s 10-year government bonds climbed 12 basis points in the past two weeks to 4.22 percent on Oct. 30, the highest since September 2008, according to Chinabond data. The yuan rose 0.45 percent in October, the most since May, as the central bank focused on controlling inflation. The currency was little changed at 6.0940 per dollar in Shanghai today.
“The PBOC tends to be vague, but you can tell from their actions they’re determined about tightening,” said Huang Wentao, a Beijing-based bond analyst at China Securities Co., the nation’s third-biggest underwriter of corporate debt. The liquidity squeeze will subside by mid-November, he added.
China’s foreign-exchange reserves, the world’s largest stockpile, rose to $3.66 trillion in the third quarter, a sign the government’s efforts to protect growth drew money even as developing nations from India to Indonesia saw the exit of capital. Yuan positions at China’s financial institutions accumulated from foreign-exchange purchases climbed 0.5 percent, the most since April, to 27.5 trillion yuan. The average yield on Dim Sum bonds dropped 30 basis points to 4.02 percent yesterday in Hong Kong, a Bank of America Merrill Lynch index shows.
“While there has been a lot of progress and there are a lot of opportunities, investors in Chinese companies in the Dim Sum market still have to deal with issues of financial and policy transparency,” said TCW’s Loevinger, a former U.S. Treasury Department senior coordinator for China affairs. “With some other central banks you have a better sense of who the decision makers are and how they voted on major policy decisions.”
The PBOC halted bill sales in June after the seven-day repo rate surged to a record. It didn’t make any official comment in the week ended June 21, and released a statement on June 24 dated June 17 saying there’s a reasonable amount of liquidity in the financial system and that banks should control risks from credit expansion.
Aggregate financing, a measure of credit that includes trust loans, stock and bond sales, was 1.4 trillion yuan in September, more than double the amount of five years ago.
“The PBOC has a much higher level of credibility than it deserves,” said Michael Shaoul, chairman and chief executive officer of Marketfield Asset Management LLC in New York, which oversees $17 billion of assets. “If you look at what they’ve allowed to happen, the degree to which credit has expanded over the last couple of years, I think it’s reckless.”
Export-Import Bank of China postponed two bond sales due to market turbulence, an official at the policy lender said Oct. 25., while China Development Bank Corp. reduced the size of its bond offering to 15 billion yuan from 26 billion yuan on Oct. 29. When Chinese regulators tightened money supply in June, at least 22 companies scrapped or delayed debt sales.
“The events in June highlighted to a lot of people how a lack of transparency can exacerbate market volatility,” said TCW’s Loevinger. “Winston Churchill’s characterization of Russia can still be applied to China’s monetary policy making: ’A riddle, wrapped in a mystery, inside an enigma.’”