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PBOC’s Attempt to Exit Crisis Mode Faces a $500 Billion Test

Chinese one-hundred yuan banknotes are arranged for a photograph in Hong Kong, China, on Thursday April 23, 2020. Photographer: Paul Yeung/Bloomberg

China’s banks need about $500 billion in fresh liquidity this month to roll over existing debt and buy government bonds, complicating the People’s Bank of China’s efforts to exit crisis measures.

Monetary policymakers have been signaling for weeks that abundant funding made available to tide the world’s second-largest economy through the coronavirus slump will soon be reined in, mindful of rising debt risks.

At the same time, over a trillion yuan in new government stimulus bonds are expected to be offered this month, putting the onus on the PBOC to ensure the financial system has sufficient cash to absorb them.

It’s a tricky balancing act. If the central bank doesn’t inject enough liquidity or even drains it, then lenders will scramble for cash, driving up inter-bank rates and undermining the recovery. If it pumps in too much money, the surplus cash will likely find its way to frothy stock and property markets and add to the nation’s already massive debt pile.

The PBOC will be “more conservative” in cutting interest rates and banks’ reserve ratios in the second half, but keep supplying short-term funds to banks, according to Ming Ming, head of fixed-income research at Citic Securities Co in Beijing. “Aggregate easing tools will be shelved, while tools directing credit to the real economy will stay.”

Much Less Stimulus

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Breakdown of liquidity pressures in August:

  • A net 1.1 trillion yuan in central and local government bonds will be sold, according to the mean of estimates by Standard Chartered Plc, Citic Securities Co., Huachuang Securities Co., Tianfeng Securities Co., Founder Securities Co. and Everbright Securities Co.
  • 550 billion yuan in medium-term loans will mature, as will 100 billion yuan in 7-day reverse repo lending and 50 billion yuan in government deposits.
  • About 1.7 trillion yuan in negotiable certificates of deposit will mature, according to data compiled by Bloomberg. These are an important funding tool for medium and smaller banks.

Without proper aid from the PBOC, Chinese banks will see their excess reserve ratio — a key liquidity indicator – falling further from the current low level. The ratio for banks and non-bank financial institutions stood at 1.6% at the end of June, according to the central bank.

CHINA INSIGHT: Tighter Liquidity Beckons PBOC Fund Injection (1)

Economists from UBS AG, Goldman Sachs Group and others have also dialed back their forecasts for interest rate cuts or other outright monetary easing measures. With the nation’s leaders calling for a more “precisely oriented” monetary policy, fiscal policy will be responsible driving the recovery in the rest of 2020.

What Bloomberg’s Economists Say..

“We are sticking to our projection for another 20 basis points of declines in the one-year Loan Prime Rate and 100 bps of cuts to banks’ reserve requirement ratio by year-end. That said, we recognize the risk that the PBOC may be more inclined to slow the pace of easing or stay on hold.”

David Qu, Economist

For the full note click here

Proactive fiscal policy needs accommodation from monetary and regulatory policy to avoid crowding out private lending, Li Zhennan, an economist at Goldman Sachs Group in Hong Kong, wrote in a report. “The PBOC needs to avoid an over-tightening that jeopardizes the growth recovery, by keeping liquidity relatively supportive to avoid further decline in bond issuance.”


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