Did Chinese monetary policy makers undertake the right moves to curb ‘shadow’ banking excesses?

The topic of discussion has been in the limelight throughout many financial presses regarding the recent moves undertaken by the Peoples’ Bank of China (PBOC) to curb the amount of lending, and controversies surrounding the delays in intervention by the monetary policy makers to bring down the interbank rates, which spiked to approximately 14.0 percent for the seven-day repurchase (Repo) rate, and the volatilities surrounding the various interest rates quoted in China, including the Shanghai Interbank Offered Rate (SHIBOR). Was intervention too late in suppressing the uncertainties and nervousness expressed by investors during the past week’s events? The timing could not have been better; following the announcement from the US Federal Reserve (US Fed) on Wednesday, June 12, 2013, indicating that the monetary policy makers over there will begin winding down its USD 85.0 billion a month Quantitative Easing (QE) programme starting in the second half of 2013 and eventually completing the process by the middle of 2014.

The cash crunch faced by many Chinese banking entities did not occur over the course of a week or so, as seen from last week’s market sell-offs across the board, but a prolonged history of excessive lending to the inefficiently-run State-Owned Enterprises (SOEs), small-and-medium sized enterprises (SMEs) which are poorly managed, and facing financial difficulties, real-estate property firms which have been attracting speculative money, but have now been seeing a glut in the housing numbers, and rise in occupancies/vacancies, etc. in certain key cities such as Shanghai, Beijing, etc. The property curbs issued by both the Central Government in Beijing and the provincial governments have targeted speculative real estate investing in order to curb any potential housing collapse. In addition, China’s Purchasing Managers Index (PMI) measured by HSBC has been declining to new lows, with the current flash estimate for the month of June standing at 48.3 (May 2013 final estimate was 49.2), with 50.0 as the neutral level, suggesting severe contraction. The Chinese Yuan currency has also been appreciating due to the speculative inflows, and unwinding of the Yen-carry trades which could be destabilising if not properly managed. The Chinese financial markets have been booming for the past few years, and have since been declining, as we have observed on Monday, June 24, 2013 when China’s CSI 300 Index, and the Shanghai Composite Index (SHCOMP) tumbling to new lows, and are officially being declared as bear-market territory levels, with the CSI 300 Index down by approximately 6.3 percent as of market close on June 24.

On June 25, 2013, in an updated economic assessment published by economists from Goldman Sachs Group, Inc., and China International Capital Corp, and quoted in a Bloomberg Online news article, it joined with several other banks ranging from Barclays Plc to HSBC Holdings Plc in paring their growth projections for China in 2013 to approximately 7.4 percent, which is below the government’s 7.5 percent target. The latest World Bank and International Monetary Fund (IMF) have also revised their growth estimates to an average of between 7.0 percent to 8.0 percent for 2013 from their previous estimates of above 8.0 percent. The new revision to the economic assessment made by the investment banks came at a time when PBOC announced that there is ample liquidity in the monetary system, and will adopt the so-called ‘fine-tuning’ policies by not intervening in the markets unnecessarily, and urge banking and financial institutions to curb their lending activities, adopt strict loan guidelines when issuing loans, and reining in on the ‘shadow’ banking system in order to curb any speculative excesses that might arise in order to forestall any potential instabilities and shock to the overall banking system should the easy monetary policies in both the United States and China were to cause major worldwide economies to falter.

One of the most notable commentaries I’ve came across since Bloomberg News announced on Friday, June 21, 2013, that PBOC has injected approximately USD 8.2 billion into the monetary system in order to calm the markets was the quote made by one of the guests Mr. Robert Subbaraman, chief economist for Asia, ex. Japan for Nomura Holdings Inc. appearing on the Bloomberg Television Online programme, “First Up with Susan LI” on June 25, 2013 during the Asian trading hours. In that segment, he mentioned that by reining in on speculative borrowing, the Chinese policy makers might be trying to send signals to the markets and investors that the Chinese leadership is prepared to accept a short-run slowdown in the economy, and not risking a potential long-term growth of approximately 3.0 to 4.0 percent. The moves recently by the PBOC, as well as the real estate curbs were being introduced in order to engineer growth towards a more sustainable path. Others disagree indicating that China may be reaching a potential saturation point due to demographics, the one-child policies, widespread corruption among officials and businessmen, food safety and health, etc.

My thoughts on the events taking place in China over the course of an entire week since June 17, 2013, and as well as latest moves to rein in speculative capital seen as taking the initial steps to prepare the markets for a major correction of the asset markets. It is quite reminiscent to the recent US Fed moves to start its tapering programme, and winding down completely by mid-2014. The PBOC does not want to give the impression to investors that the ‘shadow’ banking system is an acceptable form of lending system. However, I have concerns as to the potential risks that if PBOC did not use its monetary policy tools effectively in order to time their decisions on whether to intervene into the interbank market, resulting in prolonged uncertainties. The sudden shifts in interbank rates might cause market panic, and potential sell-offs, resulting in global market meltdown, which is destabilising and could potentially be an irresponsible act on the part of both the PBOC and the Chinese leadership if they do not fine-tune the balance between sustainable economic growth, and monetary expansion/contraction accordingly.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc