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PBOC still Refrains from Cash Injection despite Large Banks’ Pressure

Soft economic data in May and recent lack of liquidity pushed large Chinese banks to urge PBOC to inject more liquidity into the money market and lower the reserve requirement ratio (RRR).

 

More from the Wall Street Journal:

 

China’s big banks are pressuring the central bank to free up funds to ease an unusual cash squeeze in the world’s No. 2 economy, according to people familiar with the matter

 

The tight liquidity situation is leading to some calls from Chinese banks for the People’s Bank of China to inject more cash into the market by lowering the share of deposits banks are required to set aside against financial trouble. The measure is known as the reserve-requirement ratio, or RRR. “Internally, we’re hoping for an RRR cut by the end of Wednesday,” said a senior executive at one of China’s top four state-owned banks.”

 

Nevertheless, those expectations may have to be scaled back after May home prices across 70 main cities rose 6% YoY, up from an already 2-year high of 4.9% YoY in April. These numbers show that inflationary pressures are still elevated and the access to property market will be complicated for first-time buyers which is what officials want to avoid. In these conditions, PBOC refrained from injecting liquidity through routine operation in today’s session sending a strong signal of its unwillingness to ease monetary policy.

 

More from Nasdaq:

 

“China’s central bank refrained from injecting any funds into the country’s interbank market via a routine liquidity operation Tuesday, sending a strong signal of its unwillingness to ease what it sees as a structural, temporary cash crunch despite record-high short-term interest rates.”

 

The People’s Bank of China didn’t offer any seven- or 14-day reverse repurchase agreements in Tuesday’s open-market operation, though it gauged investors’ demand for these products Monday, traders participating in the operation said.

 

Instead, the PBOC went ahead with a planned sale of 91-day central bank bills Tuesday, a move that would withdraw cash from the interbank market.

 

Though the size of the bill sale is negligible, the absence of any liquidity injection Tuesday came as a surprise and suggested the PBOC is unlikely to succumb to pressure from some commercial banks to free up funds to ease an unusual cash squeeze, analysts said.

 

My view

 

- Since several weeks, PBOC has showed its unwillingness to ease its monetary policy in order to control several risks (overall accumulation of debt as well as the lightly regulated “shadow banking” institutions), to limit inflation (CPI, PPI) and to curb property prices.

 

- Even if the latest data showed that inflation slowed in May, money supply (M2) increased by 15.8% YoY well above the official target of 13% YoY while the accumulation of credit is unprecendented. Moreover, housing prices grew at their faster rate since almost two years at 6% YoY adding concerns about the ability of first time home-buyers to access property market.

 

- Therefore, I still believe that PBOC will not ease its monetary policy until Q3 2013 because the country needs to widen property tax trials to curb property prices. Remind that the government in March stepped up a three-year campaign to cool home prices, with Beijing issuing the toughest measures among 35 provincial cities.  Besides, PBOC needs more room (less inflation, less money supply) before pumping new money.

Corelogic Data Shows Existing Home Prices Increased by 12.1% YoY in April

According to Corelogic data, house prices, including distressed sales, rose 12.1% YoY in April, up from 10.9% in March. It was the biggest year-over-year gain since February 2006 and the 14th consecutive increase.
 
Corelogic index is a 3-month moving average and is not seasonally adjusted.

 

The report gave more details:
 

“Home prices, including distressed sales, increased by 12.1 percent in April 2013 compared to April 2012. The rise in the Corelogic Hpi was the biggest year-over-year gain since February 2006 and the 14th consecutive increase in home prices. Excluding distressed sales, home prices increased by 11.9 percent year over year.
 
On a month-over-month basis, home prices increased by 3.2 percent in April compared to March data. Since March 2005, month-over-month gains have been at or above 2% just five times, with all occurring in the last year. Excluding distressed sales, home prices were up 3 percent month over month in April 2013.
 
Despite double-digit gains in April, home prices nationwide remain 22.4 percent below their peak, which was set in April 2006. Home prices, excluding distressed sales, were still 16.3 percent below their peak. Distressed sales is composed of short sales and real estate owned (REO) transactions.”

 

Finally note that the trend should continue in May as the CoreLogic Pending HPI indicates that May 2013 home prices, including distressed sales, are expected to rise by 12.5% on a year-over-year basis from May 2012 and rise by 2.7% on a month-over-month basis from April 2013.
 
This report supports Zillow forecast which is very optimistic regarding April Case Shiller 20 figures that will be published on June 25. According to Zillow,  the April 20-City Composite Case-Shiller Home Price Index (NSA) will rise 12.1% on a year-over-year basis and the seasonally adjusted month-over-month change from March to April will be 1.7%.