First Australia, now China. Has the tightening cycle begun in ernest?
Fears of the real-estate bubble leads to action, or just a technical measure? Probably a bit of both..
Thursday, 07 Jan 2010 07:18 AM
China’s central bank surprised markets on Thursday by raising the interest rate on its three-month bills for the first time since August, intensifying its grip on liquidity a day after it promised to keep credit growth in check.
While analysts said the move was just a withdrawal of surplus cash in the system, markets feared the worst, taking it as a sign the central bank could be getting ready to use more forceful measures to cool growth and fight inflation, such as raising benchmark lending rates.
The move was accompanied by the biggest weekly net drain from money markets in 11 weeks.
The prospect of a tougher policy stance from Beijing sent Chinese shares tumbling and hit a range of commodities, as investors feared that putting the brakes on growth could weaken the appetite of the world’s third-largest economy for steel, copper and other resources needed to fuel it.
But analysts said the move should be seen more as an effort by the People’s Bank of China (PBOC) to even out the flow of liquidity into the system, in particular to press banks not to repeat the start-of-the-year rush to lend that marked 2009.
“We don’t read much into this as this is a one-off case,” said Chris Leung, economist with DBS in Hong Kong.
“Monetary accommodation will remain in place and though overall bank lending will be lesser this year than the last, it is still too early to talk about a withdrawal.”
The PBOC on Thursday sold three-month bills at a yield of 1.3684 percent, up 4.04 basis points from 1.3280 percent last week, the level it has kept over the past four months.
China’s key stock index fell 1.9 percent as the move sparked worries about a possible imminent interest rate hike.
Meanwhile, the yuan hit a one-month high against the dollar in benchmark offshore one-year non-deliverable forwards (NDFs) on expectations of higher rates.
Offshore non-deliverable interest rate swaps rose across the board. One-year NDIRS rose to a 16-month intraday high of 2.19 percent, up 14 basis points from 2.05 percent at Wednesday’s close and the 10-year NDIRS gained as much as 14 bps to 4.39 percent.
Commodities bore the brunt of the investor exodus, with oil slipping below $83 a barrel on concerns about demand from China and Shanghai copper futures losing all of a near-5 percent gain to snap a 10-day winning streak.
London Metal Exchange copper fell almost 2 percent at one point to $7,640 a ton from a 16-month peak near $7,796.
“The strong reaction of the markets appears to have excessively implied that China might signal an imminent interest rate hike, but this is very unlikely a case until at least late in the second quarter,” said a dealer at a European bank in Shanghai.
“China typically uses open market operations, including auction yields of its bills, to signal the momentum of quantitative tightening,” she said.
“Only hikes of official interest rates will really signal a monetary policy tightening.”
The PBOC is set to mop up a net 137 billion yuan from the money market via bills and bond repurchase agreements this week, its biggest weekly drain in about four months.
“Let’s put this in context,” said Robert Rennie, chief strategist for Asia at Westpac Banking Corp in Singapore.
Over the past eight months, the PBOC’s assets, or its reserves, have risen by around 1.6 trillion yuan ($234 billion) while its liabilities — bills, bonds, repurchase agreements and reserve requirements — were roughly unchanged, Rennie said.
“So the fact that the PBOC has drained 137 billion yuan and raised rates by 4.04 bps suggests they are moving to withdraw some of this very rapid rise in liquidity,” he said. “But it is very hard to describe this as a tightening in my view.”
Traders said the PBOC’s move appeared to be aimed at banks as a warning that it would not tolerate excessive lending in the early months of 2010 like the banks did in the same period of 2009.
Concerns about rising inflation and asset bubbles in the key property sector were also among reasons for the move, they said.
“Market talk is that some banks have intentions to lend some 50 percent of their planned new loans for 2010 in the first quarter so as to offset the impact of possible monetary tightening later in the year,” said a senior dealer at a Chinese state bank in Shanghai.
On Wednesday, China’s central bank said that it would pay particularly close attention to the property market in 2010 while managing inflationary expectations.