Divyang Shah, Senior IFR Strategist
PBoC governor Zhou Xiaochuan has highlighted that it will strike a balance between reforming the economy and keeping growth on an even keel.
The key message is that we are unlikely to see the extreme events of last week when the money markets became dysfunctional, with Mr Zhou saying that they will “use all kinds of tools and methods to appropriately adjust liquidity and to maintain the overall stability of markets.”
This is not a return to business as usual but a desire to have a more controlled deleveraging.
Any irresponsible lending behaviour is not going to disappear overnight, and banks will have to understand that they need to reduce some activities - especially those associated with wealth management products (WMPs). While the potential for unintended consequences remains, at least the market is reassured that the PBoC is willing to step in and play its role as lender of last resort.
The cost of teaching a lesson to banks on responsibility has been a 15% fall on China’s main stock market this month and benchmark repo rates that are still 200 bp above where they were a month ago.
Markets will have to remain cautious as we will get pockets of volatility, but don’t expect the PBoC to always come to the rescue in its effort to make sure that banks move in the direction of more responsible lending.
A sourced report from Reuters says China’s banking regulator has reiterated a request for banks to report all funds raised for local governments, including those funds raised via WMPs. Such requests are likely to become regular and standard as the authorities look to mark-to-market their desire to ultimately limit the growth in the credit bubble.
