Why would any central bank try to disguise the fact that it is being highly accommodative in its own money markets? That would be a strange place to start, made all the more so by the further observation the same central bank is perfectly happy if you thought it was doing the opposite. Cryptic introduction aside, it is obvious I mean China and the media’s ongoing description of the PBOC tightening.
It all starts with the reverse repo rates. From these (there are several, only the 7-day reverse repo is depicted above) we are told that China’s central bank has sprung to action in order to stifle monetary exuberance. Why they haven’t raised their benchmark rates or the RRR is a question never pondered.
That’s because this narrative starts, as always, with the certainty that China’s economy is on the cusp of massive growth; or, at least in the context of the past few years, some actual growth. Therefore, even the slightest change in something is immediately seized upon as evidence that central bankers think the same way. Since policymakers are given high space in the mainstream economic hierarchy, voila, the supposition is proven sufficiently for media publication.
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One thing to notice is that SHIBOR rates lead reverse repo rates – by design. The latter are open market operations meant solely to “clean up” whatever happens in the private RMB markets. You could in theory “raise rates” using reverse repos, but why would you ever want to?
And that’s not what’s happening in RMB anyway, at least not more recently. A great deal of what ends up in interbank money markets flows through China’s largest banks. That’s always been the case, a lot more so the past few years of the “rising dollar” as overall bank reserve growth has become very scarce (as a result of “dollar” tightening on the PBOC’s asset side).
In November, the central bank reported still lower forex assets even though according to other sources (SAFE) China is adding to its foreign reserves. Bank reserve growth has been instead constrained by that topline pressure as well as clear reluctance on the part of officials to simply open up the RMB spigots.
The lack of monetary growth has meant an increasingly volatile trade in both repo and unsecured (SHIBOR) interbank lending/borrowing. The Big 4, unable to expand with enough vigor or depend upon these markets for reliable funding of their own, have left less and less RMB for use by other Chinese banks operating within them. Instead of a redistribution point, the Big 4 in 2017 have become a bottleneck. That’s the real tightening.
The money rates in China show that rather than any kind of intentional PBOC strategy – all except the past two months dating back to early September (when else?).
SHIBOR and repo rates have exhibited a clear downward rather than upward bias. And they have done so despite the Big 4 cutting back even more on excess funds made available to those markets to multi-year lows. According to just the bottom half of the chart shown above, we would expect China RMB rates to be rising rather quickly and unsteadily.
Why aren’t they?
The PBOC injected a huge amount of RMB, about 1.2 trillion, combined in October and November. But almost none of it was filtered through the Big 4 banks.
If you remember, the reverse repo(s) was not the only rate adjusted recently or this year. The rate charged at the Medium-term Lending Facility (MLF) window was also pushed up in what seemed like a complimentary move for the “rate hike” view. The MLF was largely a means for channeling RMB into these biggest banks.
In other words, the PBOC raised the rate on a liquidity program that it isn’t using much at all in 2017. Instead, we have to ask where all that other RMB went if not through the Big 4. More than that, why would the central bank would act this way so blatantly bypassing those institutions that last year were crucial in its plans to finally offset the “dollar” crush?
As to the first question, we know where some of it went as it clearly found its way into the interbank markets through second tier institutions, thus the downward bias in SHIBOR especially during October and November. That unsecured and repo rates didn’t fall more is testament to just how difficult RMB markets have become in 2017.
And it isn’t really much of a mystery as to why the PBOC might wish to avoid entangling itself further (in RMB) with the Big 4. In every likelihood they’ve been highly distracted by other things going back to early September:
It all adds up to a situation where China’s central bank is doing the opposite of tightening or raising rates, but would be perfectly happy if you thought it was. Stealth accommodation of this variety aids in its primary purpose, which is CNY stabilization first and foremost. The imagining of tightening and raising rates helps further that goal while actual RMB accommodation doesn’t.
China’s ongoing, never-ending “dollar” problem is still pressuring internal monetary mechanics. With an economy that isn’t gaining any momentum (for the same monetary reasons), what other choice is left for Chinese officials? It appears to be CNY or bust at this point, which is almost surely why PBOC Governor Zhou issued his weirdly specific warning in early November. I have no doubt that he was expecting the Western media (they are predictable) to assist in his policy goals by seeing what they (always) want to see, thus the reverse repo/MLF rate farce at the same time real RMB was flowing.
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