Yesterday the People’s Bank of China conducted its first reverse repo operation since February. From Bloomberg:
China’s central bank conducted reverse-repurchase operations for the first time in five months, helping alleviate a cash squeeze that drove the benchmark interbank lending rate to a four-week high.
The People’s Bank of China added 17 billion yuan ($2.8 billion) to the financial system today at ayield of 4.4 percent using seven-day reverse repos. That compares with 3.35 percent when the contracts were last issued on Jan. 31 and 3.45 percent at a Feb. 7 auction of 14-day agreements, according to central bank data compiled by Bloomberg. Interest-rate swaps and money-market rates declined, while China’s stocks rose.
“The PBOC is not prepared to ease liquidity aggressively; that’s why they offered these reverse repos at a higher rate than before,” said Albert Leung, a strategist at Bank of America Merrill Lynch in Hong Kong. “At the same time they are also prepared to step in when the liquidity is too tight, so most likely the situation will be that liquidity will be tighter in the second half of the year than the first half.
China’s central bank has injected money into the financial system for the first time in nearly half a year, seeking to stave off a repeat of the cash crunch that blighted the economy in June.
The People’s Bank of China pumped Rmb17bn ($2.8bn) into the money market via seven-day reverse repurchase agreements on Tuesday, the first time it has conducted that kind of liquidity injection since February 7.
The amount was relatively small but its intent to prevent cash rates from drifting too high was clear, and the impact was immediate. The seven-day bond repurchase rate, a key gauge of short-term liquidity in China, fell 14 basis points to 4.98 per cent. The stock market also jumped, with the Shanghai Composite Index gaining nearly 1 per cent.
The central bank said at the time that it was using the squeeze to warn lenders to do a better job of managing their liquidity and to rein in overall credit growth. Lending has remained strong since the crunch, but off-balance-sheet credit issuance has slowed. Until today the central bank has steadfastly refused to conduct any market-wide liquidity injections, though it has allowed older bills and repurchase agreements to mature, providing banks with some additional cash.
Even while conducting the injection on Tuesday, the central bank also made clear that the cost of capital had risen in China. The central bank set the seven-day repo rate at 4.4 per cent, well above the 3.35 per cent at its February auction. Wee-Khoon Chong, an economist with Société Générale, said in a note to clients that this was “a signal that the era of ultra loose and easy money is over”.
Xi Jinping, China’s president, said at a meeting of the Communist party politburo on Tuesday that the government needed to continue to ward off financial risks, while also pushing for stable development of the economy in the second half of the year.
The wording was similar to official statements over the past few months. Zhang Zhiwei, an economist with Nomura, said this was an indication that the government was not overly concerned by the slowing economy.
“We think the overall message from the press release today does not show a sense of urgency,” he wrote in a note to clients. “Hence we continue to believe the monetary stance will remain tight in (the second half).”
This all looks like an ongoing commitment to slow shadow credit and the associated investment. Meanwhile, a similar message emerged again from the Polibureau via Xinhua:
China’s economy will maintain steady growth in the second half of this year amid “extremely complicated domestic and international conditions,” according to the Political Bureau of the Communist Party of China (CPC) Central Committee.
The central authorities will continue to coordinate the tasks of stabilizing growth, restructuring the economy and promoting reforms, according to a statement released Tuesday after a meeting held by the Political Bureau of the CPC Central Committee.
The meeting was presided over by General Secretary of the CPC Central Committee Xi Jinping.
“Major economic indicators were within reasonable ranges in the first half of this year, and economic and social development enjoyed a good start,” according to the statement.
The authorities said they believe the country is still in a period of strategic opportunity and enjoying the foundations of steady and healthy economic development, noting that “the economy will maintain steady growth in the latter half of the year.”
…During Tuesday’s meeting, the central authorities also agreed to step up support for small and micro-sized businesses, which provide at least 80 percent of the country’s jobs and 60 percent of its GDP.
They should enjoy more access to credit and lighter tax burdens, the statement said.
It was also agreed at the meeting that while stimulating consumer spending, it is also necessary to keep reasonable investment growth. The urbanization process should be pushed forward in a proactive and steady way.
..The meeting also reiterated the significance of developing strategic and emerging industries, energy-saving businesses and the service sector.
It underscored the need to stabilize foreign trade. “Export channels should be expanded, and imports should be increased to cope with the trade frictions effectively,” according to the statement.
The central authorities also stressed to stabilize prices and strengthen production and supply of major commodities, so as to reduce impact caused by price hikes on people’s life.
That’s reform not stimulus and I’ll add that in the first half saw China grew quarter on quarter at 1.6% and 1.7%. That’s well below 7% if it continues.
