Divyang Shah, Senior IFR Strategist
China’s money markets continue to come off the boil and should keep normalising following the PBoC’s decision to allow Rmb36bn to flow into the banking system and with the passing of quarter-end.
That policymakers miscalculated in their desire to punish irresponsible lending is clear, but the focus has shifted to calming concerns over the stability of the financial system.
Whether it’s the Fed warning to wean markets off QE-related liquidity or the PBoC’s desire for more responsible lending, the reaction has been predictably the same. When markets get accustomed to liquidity/credit, it’s always difficult to shift gears. But central bankers recognise that any delay will only create larger adjustments and greater pain at a later date.
The PBoC’s desire to teach banks a lesson was both a miscalculation and miscommunication that only added to the starvation of liquidity in the money markets. But the seizing up in money markets and rumours of default on June 20 were enough to reverse to shift the emphasis toward signalling that they have the tail risks under control.
Expectations are that normality will be restored by mid-July.
Trying to clamp down on the off-balance sheet lending (shadow banks) will not happen automatically, but the flow of new lending has to start showing signs of change.
The WSJ informs us that according to a previously undisclosed meeting on June 19, the PBoC was especially concerned about increased lending in the first 10 days of June. Lending by Chinese banks was Rmb1trn (US$163 bln), an amount the PBoC had never seen before.
Seventy percent of that lending was in the form of off-balance sheet short-term notes.
The PBoC will hope that the message registered with the banks, but it seems likely that the central bank will not want a repeat of the disastrous money market events of June. Next time the lesson will not involve shutting off the liquidity taps altogether.
