Bloomberg News reported on February 08, 2014 that the People’s Bank of China (PBOC) has released its fourth-quarter monetary policy report stressing that a reasonable level of volatility in the overnight money market rates or the seven-day repurchase (repo) rates must be tolerated as the country’s central bank tries to adjust the volume of monetary flows in the system, and will be relentless in its efforts in order to reduce, or prevent any excessive speculation coming out from the shadow banking system, the asset bubbles we have been seeing in China, and the consecutive months of real estate price increases since the end of the Global Financial Crisis in the Fall of 2008.
In the latest PBOC fourth quarter monetary policy statement, it stated that,” When the valve of liquidity starts to tame and curb excessive credit expansion, money market rates, or the cost of liquidity, will reflect that..” The statement indicates that the PBOC is determined to ward off any excessive credit built-up in the monetary system, and it will show up in the money market rates. Readers might recall that the several bouts of money market rate spikes in June and September 2013, with June being the result of PBOC reining in on speculative excesses caused by the shadow banking system, and September 2013 was when PBOC was trying to curb any property market excesses as a result of the immense volumes of purchase transactions, and massive amounts of borrowing that fuelled the housing markets in China. The June 2013 episode saw rates rising to as much as 16.0 percent overnight, and was brought back down two weeks after the continuous spikes as a result of the PBOC delaying their moves in pumping liquidity into the system to calm the markets. The September 2013 saw rates rose to as much as 8.0 percent, and the PBOC took a few days before it moved in to ease off the cash crunch. The delayed intervention moves in the money markets by the PBOC is going to persist, as the PBOC is determined to stave off any speculative credit.
With the latest monetary policy statement coming out PBOC, investors should not expect the PBOC to halt its money market tightening measures, and undertake extraordinary measures to ease off the liquidity crunches going forward. An recent example which explained why PBOC did not actively participate in the negotiations among Industrial and Commercial Bank of China (ICBC), and the unit holders of the so-called “Credit Equals Gold Opportunity Trust Fund” which received much publicity regarding possible bailouts coming from the PBOC, which in the end, was accompanied with much deliberations among the Trust-holders and the unit of ICBC who was responsible for marketing the Trust product. Following a week of negotiations, ICBC decided to allow unit-holders to redeem their investments and be paid fully on the principal. The next payment date was to have been due by January 31, 2014, but with the current state of tightened liquidity conditions, the government does not want to be seen as tolerating such speculative, and ‘moral hazard’ behaviours being displayed by many investors with the assumption that the government will always step in to bailout these investors.
The PBOC stood firm in limiting its intervention in the money markets and investors should take precautions while anticipating further volatilities coming out from the money markets in China. The PBOC does not have an official communication policy to the markets, and every trading day, traders should not be expecting a normal day that can easily passed by.
Separately, other sections of the report indicated that M2, which is the broadest measure of money supply, rose 13.6 percent in December 2013 on a year-on-year (yoy) basis, slowing from a 15.8 percent pace in May. The official M2 growth target was 13.0 percent, and this could provide a guide of how investors will be expecting out of any money markets trading in China. However, investors should not be too over-complacent regarding the setting of the M2 targets as the monetary policy makers may change the targets without any prior notification. The key takeaway is that China is curbing excessive monetary flows, and investors should regard the overall monetary conditions as being tight, and not to expect easy credit to be provided anytime soon.