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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.

Chinese Money Market Rates Rise as Govt Bond Auction Fails and PBOC Remains Passive

China’s short-term funding costs jumped on Friday as the central bank kept liquidity relatively tight and the Chinese government failed to sell all its bonds at an auction.


The benchmark weighted-average seven-day bond repurchase rate, a key gauge of short-term liquidity, jumped 48 bps to 6.87% on Friday (its highest since Jan 2012), up from less than 3% a month ago. The overnight repo rate rose 8 bps to 7.02%, while the 14-day rate surged 44 bps to 7.65%.


In parallel, the finance ministry sold only CNY9.5B of the CNY15B in government debt on offer, the first time in nearly two years that the ministry has not reached its target bond sale.


PBOC has refused to inject cash into the market on a large scale, even as money rates rose steadily in recent weeks. The fact is that money supply (M2) still increased at steady rate in May at 15.8% YoY while the official target is only 13%. Moreover, housing prices keep on rising and should reach in May their highest level since last summer.


This tightness in China’s financial system is the indication that the government appears ready to tolerate slower growth to control several risks (overall accumulation of debt as well as the lightly regulated “shadow banking” institutions) and to favorize the consumer welfare (less inflation and higher purchasing power, easier access to property market).


Finally, with the quarter-end approaching, when banks traditionally try to increase deposit totals and diminish lending, liquidity could remain tight at least until the beginning of Q3. It means that Q2 GDP should slow and could be below 7.5%. On the positive side, in Q3, PBOC will have more room (slowdown of M2, CPI, PPI,  measures to curb housing prices) to reverse the liquidity squeeze by pumping more short-term cash into the market.