Divyang Shah, Senior IFR Strategist
Early in the week we had an article in the Financial News citing an an unidentified source saying that overall liquidity is sufficient and individual banks were facing problems as they had relied too heavily on the interbank market and exceeded regulatory caps on lending.
The PBOC would not help banks that had behaved irresponsibly. We now have a story on MNSI where a PBOC official is reported as suggesting banks are being starved of liquidity to teach them a lesson about responsible lending.
We suggested that this was the PBOC’s game plan last week when we said the deeper message was that the PBOC is likely looking to get control of the credit creation process by increasing the counterparty risk associated with shadow banking.
This follows regulatory action to limit off-balance-sheeting lending activity from the shadow banks. Clearly the PBOC does not want to bring the system down but create sufficient pain so that they can regain control of lending targets.
Liquidity relief will come and when the PBOC steps in then it could encourage thoughts of a lower RRR or rate cut happening in early Q3. But for now the message from the PBOC is that they are in no mood to help banks that choose to not play by the rules it sets.
