Divyang Shah, Senior IFR Strategist
The PBOC has broken its silence, and the 5.3% plunge in the Shanghai Composite shows that markets don’t like what they’re hearing.
In some ways, the PBOC’s actions echo those of the Fed and are even in tune with the latest BIS annual report, which made clear that it is time to end the liquidity party that has gone way past 4am.
It’s not surprising that global markets are under pressure as the Fed signals its intention to wind down the liquidity taps, while the PBOC says that the punch bowl is already full. Chinese benchmark money market rates have recovered from their highs but are likely to stay elevated and volatile as the PBOC holds back on providing a complete lifeline.
Remember that the PBOC’s statement was issued on June 17, and the attempt to rely on the larger banks did not yield much success last week.
The PBOC will likely look to step in and provide some liquidity just to reassure the banks that they are pursuing a tough love approach, but it now seems that a rate cut or RRR cut are unlikely.
How much support the PBOC wants to provide will be gauged at its liquidity operations this week, especially with quarter-end fast approaching. Markets are likely to be very disappointed as the PBOC decides against signalling a return to business as usual.
