A couple of weeks back, I mentioned that China would likely need to take steps to ensure ample liquidity in August.
The monetary policy divergence between the PBoC and the Fed is difficult to ignore. The Chinese central bank has taken a (much) more measured approach to stimulus over the course of the crisis, and recently warned its global counterparts that excessive accommodation risks unintended consequences — and they should know.
And yet, with core CPI slumping, PPI deflation still entrenched, and retail sales struggling to rebound, additional easing seems inevitable.
Read more: China’s July Data Deluge Disappoints As Retail Sales Fall Again
More imminently, though, the banking system was set to help absorb some 1.1 trillion yuan in central and local government bond issuance this month.
At the same time, more than a half-trillion in medium-term lending was set to mature, in addition to 100 billion in shorter-term bank repo and 1.7 trillion in CDs. Absent support from the PBoC, banks could have seen their excess reserves fall, potentially pushing up interbank rates.
Well, on Monday, the PBoC offered 700 billion yuan of one-year MLF, easily enough to cover 400 billion coming due today and an additional 150 billion maturing later this month. The rate was unchanged at 2.95% — so, they’re just rolling what’s maturing and injecting a little on top for good measure. Bond yields moved lower.
This “fully meet[s] market demand”, the PBoC said. Rates have remained unchanged on all key facilities for months. With the MLF rate steady, the loan prime rate (the benchmark) will almost surely remain at 3.85% later this week on the one-year anniversary of its revamped methodology.
Even as Monday’s liquidity injection was necessary and expected, it was nevertheless credited with pushing up mainland shares, which rose more than 2%. Financials led.
The Shanghai Composite is now the best-performing major benchmark in the world in a virus-blighted 2020, easily outpacing the S&P (but not the Nasdaq 100).
That, even as Donald Trump continues to ratchet up the pressure on anything to do with China. Investors and analysts do not believe a Joe Biden administration will necessarily be more friendly to Beijing — the tactics would change, but the “tough on China” message would not.
Last week, data showed credit creation slowed sharply in July, with new yuan loans and total social financing both missing estimates by a fairly wide margin.
The slowdown came as policymakers adopted a more cautious approach to liquidity provision amid the economic recovery and signs of froth in the equity market where a mini-bubble emerged early last month thanks, ironically, to official state media.
That underscores the tightrope walk for the PBoC: they want to ensure liquidity is ample without blowing bubbles.
Outstanding margin debt on Chinese stock exchanges dropped nearly 7 billion yuan Friday to the lowest since July 31.
