Divyang Shah, Senior IFR Strategist
The concern and uncertainty as to how the tighter liquidity conditions will play out had been weighing on market sentiment clearly visible in the sharp equity sell-off early in the week.
We are not completely out of the woods, but at least we don’t have those tail risks to worry about. We now have to be mindful of unintended consequences of the PBOC’s desire to get its banks back to supporting the real economy as opposed to supporting speculative activity and over-capacity.
The fact that the PBOC has confirmed that it helped some financial institutions highlights the degree to which things were getting out of control especially on June 20.
While money market rates are moving lower the lack of a real bounce on China’s equity market (down 0.4% overnight) shows that things are far from returning to business as usual.
There won’t be a RRR or rate cut and money market rates will likely stay elevated but at least we know the PBOC won’t allow the situation to spiral out of control.
