China: PBoC Could Turn More Proactive Next Week, But Major Easing Not in the Cards

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Action Forex Update on China: PBoC Could Turn More Proactive Next Week, But Major Easing Not in the Cards.

Peoples Bank of China (PBoC) continues to signal a relatively hawkish stance in light of the recent surge in money market rates in China. Today PBoC did not inject any liquidity in connection with its scheduled open market operations (OMO). PBoC did on the one hand stop it sales of central bank bills (in isolation gradually will ease liquidity), but on the other hand it did not immediately inject liquidity into the market through its reverse-repo operations. The reverse-operations PBoC usually does on Tuesdays have longer maturities (more than seven day’s). In the past week PBOC has mainly used the short term liquidity operation (SLO) facility to inject a modest amount of liquidity in the money market. The SLO-facility uses reverse-repos with shorter maturities (not more than seven days maturity) to inject liquidity. PBOC’s preference for the SLO-facility probably reflects PBOC’s, view that the current tight liquidity crunch to a large degree is seasonal (particularly window dressing ahead of end-H1 13 reporting by banks)

A press conference later today the message was PBoC similar. A PBoC said that liquidity was “ample”, that volatility in interbank rates was temporary and mainly due to seasonal factors and PBoC “won’t get fooled” into giving in on liquidity. More interestingly PBoC said that it will monitor “liquidity closely” and “guide interest rates to a reasonable level.” On the press conference it became evemn clearer that PBoC believe that seasonal factors have been the most important factor behind the recent surge in money market rates. Hence, PBoC appears to be in a wait and see mood until next week whre it will have a clearer view of the money market as the seasonal factors should gradually disappear. Should interest rate not decline week, we will probably see a more proactive PBoC with more aggressive injection of liquidity into the money market, albeit PBoC will remain reluctant to signal easing through a cut in the reserve requirement for commercial banks. But next week PBoC could be a stabilizing factor for financial markets. Either money market rates decline or PBoC will start to more aggressively inject liquidity into the market.

Money market rates continued to decline today for the third day in a row O/N money market rates are no longer in extreme stress territory, but remains elevated. The O/N SHIBOR fixing today declined with 75 bps to 5.75% (from at peak at 13.44% on Thursday). and the O/N bond repo interest rate declined with 47 bp to 6.00% (peaked at 12.9% on Thursday last week). he 7-day repo (the most important money market instrument in China) continued to trade close to 8%, albeit it should be stressed that in December 2010, June 2011, and December 2011 (where end-half year impact was also a major factor) the 7-day repo rate also traded close to current levels.

In our view the extraordinary surge in money markets rates to some degree reflects an impact from regulatory tightening during the spring targeting local government and shadow financing, albeit we expect money markets rates to normalize during July. We could still see considerable tension in the coming days in particularly y´the O/N rates as we get closer to end-June The regulatory tightening should gradually be evident in weaker credit growth and investment demand. For that reason we have cut our GDP growth forecast for 2013 to 7.5% from previously 7.9% meaning that GDP growth will drop below 7.5% y/y in H2 13. In our view this will not be weak enough to force a major policy easing from the Chinese government. There is downside risk from larger impact from the regulatory tightening and the PBOC and the government staying too hawkish….More at China: PBoC Could Turn More Proactive Next Week, But Major Easing Not in the Cards

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