Photographer: Qilai Shen/Bloomberg

China Gives Markets Break as Deleverage Fever Begins to Ease

  • PBOC monetary report shows little bias for more tightening
  • Central bank doesn’t want to squeeze too much: StanChart

China’s embattled investors may be finally catching a break.

After spearheading a deleveraging campaign that wiped some $500 billion from local stocks and debt, the central bank boosted cash injections this week and provided more seven-day funds, the cheapest form of financing it offers. A quarterly report from the People’s Bank of China late Friday signaled that officials see little need to drive interbank rates any higher, and they’ve refrained from increasing borrowing costs since mid-March.

Markets are responding. The yield on benchmark 10-year bonds is down seven basis points from a May 10 high, and the Shanghai Composite Index rebounded 2 percent in the last four days. While support from President Xi Jinping means there’s little chance that the campaign to reduce financial-system risk will disappear, a softer approach is welcome news for investors, especially amid signs that the economy is losing traction.

“The PBOC doesn’t want to squeeze the market and banks too much,” said Becky Liu, Hong Kong-based head of China macro strategy at Standard Chartered Plc. “The PBOC wants to carefully take care of liquidity, offering amounts that are just right, so the deleverage campaign could continue.”

China’s central bank started to boost the cost of its money-market loans in the third quarter of last year, after the previous loosening cycle pushed benchmark interest rates to record lows. It resumed the use of 14- and 28-day reverse repos in August -- to shift focus to longer tenor, more expensive cash -- and raised their costs by 10 basis points each in February and March. The PBOC refrained from offering 28-day funds in open-market operations Tuesday and Wednesday -- the first time it has avoided using the tool in six months, apart from around the Lunar New Year holidays earlier this year.

“The central bank tried to raise the costs of funds injected into the financial system to achieve the goal of deleverage, and funding costs have surged,” said Li Liuyang, a Shanghai-based analyst at China Merchants Bank Co. “It’s less necessary now to provide the funds of longer terms.”

The deleveraging efforts have hurt the nation’s stocks and bonds, with the Shanghai Composite tumbling the most this year in April and the benchmark 10-year bond yield advancing almost 100 basis points since August to a 25-month high last week. The economy is beginning to feel the stress as well, with data for manufacturing and factory gate inflation missing estimates for April.

The PBOC said in its May 12 policy report that it will mainly use the seven-day reverse repos in the daily operations, and that it will balance the efforts between deleveraging and ensuring liquidity supply. The monetary authority injected a net 170 billion yuan ($24.7 billion) into the financial system on Tuesday, the most in four months.

The comments show that the authorities want to slow the pace of monetary tightening while enhancing policy implementation to achieve the goal of reducing leverage in an orderly way, Citic Securities Co. analysts led by Beijing-based Ming Ming wrote in a research note on May 15. The authorities won’t loosen so much as to fuel asset bubbles and they won’t tighten so quickly that it will spur systemic risks, they said.

China’s Toolkit to Manage Monetary Policy: QuickTake Scorecard

"The PBOC is aware that using multiple monetary tools confuses expectation and intensifies price volatility," said George Wu, chief economist at Huarong Securities Co. in Beijing who worked as a monetary policy official at the central bank for 12 years. The PBOC is trying to streamline its toolbox to ease market volatility, he added.

— With assistance by Helen Sun, and Ling Zeng

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