China: PBoC to Pause Tightening

Published on January 28, 2021
SGH Insight
In a message that appears clearly intended to counter increasingly hawkish rate expectations, senior sources from the People’s Bank of China convey that the key short-term interest rates that have just hit six-year highs [NB – on stronger growth prospects and PBoC liquidity mopping operations] should not be interpreted as a signal that the central bank is starting to shift to a tighter monetary policy stance, and that investors should not “overly exaggerate" the impact of the central bank’s short term liquidity operations on China’s stock and bond markets.

Today (Friday, Beijing time) marks exactly two weeks to the start of China’s major Spring Festival holidays, and our understanding is that over these next two weeks the PBoC will resume open market operations, including resumption of the 7-day and 14-day reverse repos [NB -- the reverse repo nomenclature in China refers to easing, not tightening operations as it does in the West], and will conduct medium-term lending facility operations to offer sufficient liquidity to help banks get through the Chinese New Year holiday.
Market Validation
Policy Validation

(Bloomberg 1/29/21)

PBOC Says Market Talk of SLF Rate Hike ‘Untrue’

PBOC says it has noticed the rumor about potential SLF rate hike and has reported it to the police, the Chinese central bank says in a reply to Bloomberg News.

China's central bank on Friday conducted 100 billion yuan (about 15.45 billion U.S. dollars) of reverse repos amid rising fiscal expenditure at the end of the month.

The move aims to maintain reasonably ample liquidity in the banking system, according to a statement on the website of the People's Bank of China.

The interest rate for the seven-day reverse repos was set at 2.2 percent, the central bank said.
With 2 billion yuan of reverse repos maturing on the same day, the move led to a net liquidity injection of 98 billion yuan into the market.

In a message that appears clearly intended to counter increasingly hawkish rate expectations, senior sources from the People’s Bank of China convey that the key short-term interest rates that have just hit six-year highs [NB – on stronger growth prospects and PBoC liquidity mopping operations] should not be interpreted as a signal that the central bank is starting to shift to a tighter monetary policy stance, and that investors should not “overly exaggerate” the impact of the central bank’s short term liquidity operations on China’s stock and bond markets.

Today (Friday, Beijing time) marks exactly two weeks to the start of China’s major Spring Festival holidays, and our understanding is that over these next two weeks the PBoC will resume open market operations, including resumption of the 7-day and 14-day reverse repos [NB — the reverse repo nomenclature in China refers to easing, not tightening operations as it does in the West], and will conduct medium-term lending facility operations to offer sufficient liquidity to help banks get through the Chinese New Year holiday.

And while the PBoC’s new loan target for this year will be 500-800 billion yuan lower than last year, PBoC officials say new loan growth is likely to have remained stable in January and should not come in below the same period last year.

In the big picture, with the re-imposition in some regions of Covid-19 related lockdowns and travel bans, sources finally stress that the central bank is reluctant to tighten monetary policy from here and will “certainly” not hike the benchmark interest rate in 2021. Rather, the PBoC will continue to make “prudent monetary policy that is more targeted and flexible to support the economy.”

 

 

 

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