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Chinese Credit Data Give Room for PBOC to be Proactive in Q3

Yesterday, PBOC released data which show a credit slowdown in June. Aggregate financing, the PBOC’s broadest measure of credit that includes bond sales, entrusted loans and bankers’ acceptance bills, was CNY1.04 trillion in June (the lowest figure since 14 months). That was down from CNY1.19 trillion in May and CNY1.78 trillion a year earlier.

 

The decline was matched by slower growth in money supply. M2 money supply rose 14% YoY (the slowest pace in six months) and was below forecasts of 15.2% YoY. Yet, it still exceeded the government’s 2013 target of 13%.

 

Even if Premier Li Keqiang has indicated he won’t boost credit to support the economy even as the pace of expansion slows, these figures give more room for PBOC to intervene in the money market and avoid another significant rise of short term interest rates.

 

As a reminder, short-term interest rates briefly shot as high as 30 per cent late last month after the central bank declined to add cash to an interbank market gripped by tight liquidity conditions, which were caused in part by a seasonal rise in demand for cash. At least five companies canceled or delayed scheduled bond sales of some CNY32.1 billion last month amid the cash squeeze.

 

Moreover, if PBOC manages to limit M2 growth in the coming months and push it below the threshold of 13% YoY, PBOC could adopt a more accommodative stance in a context where inflation remains contained (2.7% YoY in June against a target of 3.5% YoY).

 

As a consequence, at the end of Q3, coupled with more public investment (railways, public housing…) and a recovery of global demand (US, UK, Eurozone), Chinese growth could accelerate.

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.