China’s central bank said it will keep money-market rates at a “reasonable” level and seasonal forces that have driven them up will fade.
The People’s Bank of China has provided liquidity to some financial institutions to stabilize money market rates and will use short-term liquidity operation and standing lending facility tools to ensure steady markets, according to a statement posted to its website. It also called on commercial banks to improve their liquidity management.
The statement is the first public confirmation of central bank action to ease a cash squeeze that sent China’s overnight repurchase rate to a record last week and came hours after Ling Tao, deputy head of the PBOC’s Shanghai branch, said liquidity risks were controllable. Premier Li Keqiang is seeking to wring speculative lending out of the nation’s banking system after credit expansion outpaced economic growth.
The PBOC is giving the market “a pill to soothe the nerves,” Xu Gao, Everbright Securities Co.’s Beijing-based chief economist. “The message is clear: the central bank doesn’t want to see a tsunami in China’s financial markets and market rates will drop further.”
Policy makers’ reluctance to add liquidity contributed to tipping the CSI 300 Index of Chinese equities into a bear market. Tuesday, the nation’s stocks posted the biggest swings in 22 months. The Shanghai Composite Index fell 0.2 percent at the close after declining as much as 5.8 percent.
“With the elimination of seasonal and emotional factors, interest rate fluctuations and the tight liquidity situation will gradually ease,” said the central bank, which attributed the increase in borrowing costs to a rapid increase in lending, cash demand during a holiday earlier this month and changes in foreign exchange markets.
The overnight repurchase rate dropped 47 basis points to 6 percent in Shanghai, according to a daily fixing compiled by the National Interbank Funding Center. It hit a record 12.85 percent on June 20 and has averaged 3.12 percent this year.
“We’ll closely monitor the change of liquidity within the banking system going forward, flexibly adjust liquidity management based on international payments and the liquidity demand-and-supply situation,” Ling said at a briefing in Shanghai. The PBOC will “strengthen communications with market institutions, stabilize expectations and guide the market interest rates within reasonable ranges.”
Ling’s remarks precede the city’s annual Lujiazui Forum financial conference starting June 27.
“The central bank can be a little bit more transparent with the market,” said Ken Peng, a BNP Paribas SA economist in Beijing. “The Shanghai official’s comment, had it come a few days earlier, may have helped to calm the market a bit.”
China’s central bank lacks the degree of autonomy enjoyed by its counterparts in the U.S., Europe and Japan, with the State Council, or Cabinet, playing a leading role in setting policy. The nation in March completed a once-in-a-decade leadership transition, with Li becoming premier.
“An increased level of transparency from the central bank side is helpful,” said Sun Junwei, a Beijing-based economist at HSBC Holdings Plc. “At the same time, the decision-making process at the People’s Bank of China is very different from other central banks like the Fed, so what the People’s Bank of China can do in communicating with the market may be limited.”
China’s cash squeeze is increasing the chance that Li will be the first premier to miss an annual growth target since the Asian financial crisis in 1998.
Goldman Sachs Group Inc. and China International Capital Corp. joined banks from Barclays Plc to HSBC Holdings Plc in paring their growth projections this year to 7.4 percent, below the government’s 7.5 percent goal.
“The current leadership is trying to build its reputation in a different way than the previous administration, which felt that its target was holy and had to be met regardless of the circumstances,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong, who previously worked for the World Bank.
The government set the 7.5 percent target at a March conference where Li became premier. Seventeen of 56 respondents to a Bloomberg News survey last week gave estimates of 7.5 percent or less for gains in gross domestic product this year.
Kuijs, who said the target may be at risk this year, on June 10 cut his 2013 call to 7.5 percent from 7.8 percent and projected 8.1 percent growth next year, down from 8.4 percent.
“If they fail to achieve 7.5 percent, they will lose credibility with the markets, provincial leadership and financial institutions,” said Liu Li-Gang, Australia & New Zealand Banking Group Ltd.’s head of Greater China economics in Hong Kong, who also formerly worked at the World Bank.
“That means that in the future, whenever they say something, the market may interpret it differently, and the credibility issue is something very critical for them to consider,” said Liu, who this month cut his 2013 growth forecast to 7.6 percent.
China last failed to exceed the government’s annual growth target as Asia grappled with its financial crisis in 1998, when Zhu Rongji became premier. That year, the economy expanded 7.8 percent, compared with an 8 percent goal.
Lu Ting, head of Greater China economics at Bank of America Corp. in Hong Kong, said in a note that while officials are unlikely to cut benchmark interest rates or banks’ reserve requirements, the government “will have to end the credit squeeze soon.”
“The current growth rate is quite close to the floor” that new leaders have indicated they will tolerate, Lu said.
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