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PBOC Dashes Hope/Hype For System-Wide Chinese Rate Cuts

Tyler Durden's picture




 

Following the release of the quarterly monetary policy report from the People’s Bank of China, it is becoming clear, as Goldman Sachs notes, that stimulus - via cuts to system-wide RRR and/or benchmark interest rates - is becoming less and less likely. The PBOC's introduction of a new facility called the medium-term lending facility (MLF) allows 'targeted' easing, and as one local economist noted, "it shows the central bank is very reluctant to loosen monetary policy." The PBOC has broadened its toolkit to arrest an economic slowdown, while seeking to avoid adding financial risks, as The PBOC said it would "continue to implement a 'prudent' monetary policy and use various tools to manage liquidity." Not the exuberant stimulus-fest the talking-heads are calling for reminding us, as Pettis previously concluded, "In China, it will be no different. Growth miracles have always been the relatively easy part; it is the subsequent adjustment that has been the tough part."

 

Bloomberg notes,

The People’s Bank of China confirmed it pumped 769.5 billion yuan ($126 billion) into the country’s lenders in the last two months through a newly-created Medium-term Lending Facility. The PBOC injected 500 billion yuan in September and another 269.5 billion yuan in October via the facility -- all termed at three months with an interest rate of 3.5 percent.

 

The announcement, included in the PBOC’s quarterly monetary policy statement, is the first official confirmation of earlier reports on the injections. Goldman Sachs Group Inc. said every 500 billion yuan in funds from the central bank is similar to a 50-basis-point cut in the required reserve ratio.

 

“It shows the central bank is very reluctant to loosen monetary policy, but it has to reduce financing costs for end borrowers,” said Guan Qingyou, chief macro-economic researcher with Minsheng Securities Co. in Beijing. “It doesn’t mean the new tools can replace traditional tools forever.”

 

...

 

The operations “affected mid-term interest rates while providing liquidity to guide commercial banks to lower their lending rates and overall social-financing costs,” the central bank said in the report published yesterday. “As liquidity generated from capital inflows eases, MLF has played a role of covering the liquidity gap and maintaining a neutral and appropriate liquidity situation.”

And as Goldman Sachs explains,

China: The PBOC’s Q3 monetary policy report revealed refinements to the monetary toolbox, but provided no indication of any major change in policy stance.

 

The quarterly monetary policy report from the People’s Bank of China revealed that the central bank had introduced a new facility called the medium-term lending facility (MLF) to inject large-scale liquidity (with a 3-month tenor) in September and October. This was intended in part to guide medium-term interest rate expectations but also as an offset against slow FX inflow. Compared to the Q2 report, there were no major changes in the language related to policy outlook. We do not rule out the potential for high-profile actions, such as cuts to system-wide RRR and benchmark interest rates, but continue to believe the probability of such moves is lower compared to further targeted easing.

 

Main points:

 

The Q3 monetary policy report used largely the same language as in the previous report regarding the PBOC's policy stance (i.e., maintaining a stable monetary policy). But it gave more color on the methods that the central bank has deployed behind the scenes to ease financing conditions. There have been media reports that suggested large-scale PBOC injections in September and October. This monetary policy report clarified that the injections totaled RMB770bn, and were made through a new facility called the MLF to various commercial banks (including state-owned, share-holding, large city banks and some rural banks) that satisfy (unspecified) prudential requirements. The liquidity carried a 3-month tenor at 3.5% interest rate (in comparison, 3-month SHIBOR was about 4.5% during the period). The facility is intended to guide interest rate expectations as well as to offset the recent slowdown in FX inflow. It is not entirely clear how the MLF in practice differs from the SLF (Standing Lending Facility) that was introduced early last year, but one likely distinction is that the former appears to be initiated by the PBOC while the latter is supposedly initiated by the banks themselves.

 

Other than the liquidity injections, the report mentioned that the PBOC has also lowered the interest rate charged on the PSL (PBOC loans to finance shantytown redevelopment) since September in another attempt to guide market interest rates lower. In addition, the central bank has been actively utilizing the long-standing dynamic RRR arrangement to lower RRR for individual banks, based on their capital ratio and loan allocation (those that lend more to the agricultural sector and small/micro enterprises benefit more).

 

With all these policy maneuvers, long-term bond yields have been falling significantly in the past couple of months. Even bank lending rates have also declined. The report indicated that the weighted-average bank loan rate edged down by 12bp from August to 6.97% in September (although still 1bp higher than the June level that the Q2 report indicated).  Similarly, average residential mortgage rate also fell 5bp from August to 6.96% in September (although still the same as the June level). Interbank liquidity was also kept relatively loose, with excess reserve ratio rising to 2.3% in September from 1.7% in June.

 

Lastly, while not dismissing the option of high-profile actions, such as system-wide RRR cuts and reduction in benchmark interest rate, the report cautioned in a couple of places against “turning the water tap wide open” and emphasized the need for maintaining a flexible policy stance.

*  *  *

The CNY fixing is now at its weakest in 2 months as it appears reaction to the end of QE and the BoJ's surge pushed the PBOC to shift trend...

 

*  *  *

As we previously discussed...

Allison Nathan: Given how daunting some of these challenges seem to be, is China heading for a hard landing?

Michael Pettis:

I think the soft landing/hard landing debate misrepresents the structure of Chinese growth.

China’s options are not a soft landing of 6-7% growth for the rest of the decade or a hard landing of growth below 5%.

The real choice is between either what I call a long landing, in which growth drops on average by roughly 100 to 150 bps per year, or a soft landing followed by a very hard landing.

The long landing scenario requires that the reforms be implemented reasonably quickly, because we may only have another three or four more years before we run out of debt capacity, but not disruptively. A long landing won’t be easy and it will require political skill at playing off the different interests, but it would be orderly. And while annual growth rates in this scenario wouldn’t average much above 3-4% during President Xi’s administration, rebalancing means household income growth would be higher, and so the decline in the income growth rate of ordinary Chinese wouldn’t be anywhere near the decline in overall GDP growth rate.

If, instead, we have what everyone would hail as a soft landing, with growth remaining above 6-7% for another two years, it would just mean that credit was still growing too quickly. And once we reach debt capacity constraints, the so-called soft landing would be followed by a very brutal hard landing.

*  *  *

 

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Thu, 11/06/2014 - 22:56 | 5422349 surf0766
surf0766's picture

It's ok. Some other group of assholes will cut or print..

Thu, 11/06/2014 - 23:04 | 5422371 TruthInSunshine
TruthInSunshine's picture

For all the talk of "imminent crashes," an intelligent case can be made that China & Japan are slowing to the point of real economic contraction on MoM (many consecutive months) and YoY basis, and that each is suffering from other legitimate crises (China - property market and spoilation in bank loans; Japan - a literal currency war launched that's dragging export dependent co-Asian neighbors into currency debasement by necessity).

I think this is the best strategic point to think about shorting equities since 2007.

Nearly every credible, historically reliable global data point is credibly demonstrating that debt-laden consumers and corporations are declining in terms of their ability to either produce or consume via accumulating new debt, there is a commodity bear market underway with a long way to fall from a technical and fundamental perspective, and there's been a nearly 8 year super-cycle of leverage, debt/credit dependent consumption and risk asset appreciation from the last trough to today's new peak (and a historically high/record one based on corporate and consumer debt levels).

Finally, the law of diminishing returns has evolved into near or true negative returns in terms of central bank "pushing on a string" monetary policy, and this comes at a time when some of the largest CBs have already engaged in historic, massive fiat production and stimulus, plus 6 years of either ZIRP or NIRP interest rate policy, and now even those artificially low (rigged) rates are failing to stem a drop in borrowing, production and consumption.

Aggregate demand is now dropping at an accelerated pace arguably BECAUSE OF, and NOT DESPITE OF, extreme central bank monetary policies.

Thu, 11/06/2014 - 23:12 | 5422382 Newsboy
Newsboy's picture

China is stocking up on oil, and other commodities, rather than (further) debasing their currency.

They have a little bit longer view, and know that getting all those commodities onto Chinese soil will be a good thing to have done, rather than hold any flavor of fiat currency, including their current version.

Fri, 11/07/2014 - 01:20 | 5422405 TruthInSunshine
TruthInSunshine's picture

And they'll probably increase stockpiling oil and critical materials as long as the price keeps dropping; it's rational.

However, this supports my thesis. Instead of prodding regional banks to extend more credit for increased business production or domestic consumer consumption, they're allocating fiat towards things such as adding to strategic oil supplies, etc.

Also, I pretty much assume that real Chinese economic metrics are 33% to 50% worse than officially reported. For instance, if China officially reports 7.4% nominal economic growth, I just assume that the actual figure is much closer to 3% to 5% (which could mean contraction in real terms, in either case).

Chinese exports are sucking wind, the Baltic Dry Index is scraping bottom again, and China's largest trade partners are all suffering consumption issues born of shrinking aggregate demand domestically.

*I am working on a thesis that specifies the third week of this November (a mere 10 days away) as to be hugely significant in global economic terms, but not all the pieces fit together clearly yet. This isn't based on numerology or any such thing, but major pending events.

Fri, 11/07/2014 - 02:27 | 5422765 tarabel
tarabel's picture

 

 

China is stocking up on commodities at yesterday's price while today's price is lower and tomorrow's price will be lower still. And people congratulate them on their superior intellect.

Meanwhile the dollars they spend today will buy more tomorrow and even more the day after that. If they still had them.

Scenarios to keep an eye on:

1) They're crazy.

2) They are stocking up on strategic materials subject to blockade by the USN, which heralds trouble.

3) They are getting rid of FX in exchange for commodities in the belief that FX values are close to the top and will soon fall back down.

          a) They are making a bold gamble that will pay off handsomely if USD collapses soon.

          b) They're crazy and will have warehouses stuffed with goods bought at way above market prices while prices for everyone else using JIT inventory methods drops significantly, thus damaging China's already disappearing competitive advantages.

 

Thu, 11/06/2014 - 23:12 | 5422388 Renewable Life
Renewable Life's picture

So who gives a shit what China does at this point, what I can't wait for is the "the Obama revenge" that's coming soon!!

If you think that egomaniac, self righteous, lunatic is going to sink quietly into the night, you've been smoking crack the last 6 years!!

The Kenyesian globalist sociopaths had Obama printing like a drunken sailor as long as he got to be the savior of the planet, now that he's been "betrayed", there will hell to pay very soon, and I expect the suffering and loses will be epic for the ones who did the betraying!!

Obama will simply let the collapse come and probably accelerate it if he can, just to watch them all burn and beg for help, at which time he'll revel in his moment he tells them, "you should have voted for us, now you pay the fucking price"!!

No GM bailout, Lehman style bailouts, shale industry bailouts, worker bailouts, and as much as most of us on ZH will celebrate this development, 95% of Americans will never see it coming!! It's going to be full blown chaos!!

Fri, 11/07/2014 - 00:20 | 5422565 Wild Theories
Wild Theories's picture

who cares? banks care

and they are sorely disappointed China is not 'doing its part' to juice global growth, just as they are disappointed with the ECB for not doing enough to 'boost growth' also

 

so they generate constant rumours and talk-shops that China needs to stimulate to avoid a crash, "oh noes China is on the verge of a crash -quick they need to stimulate!", even going as far as cooking up a wild rumour on WSJ that the PBoC head will retire to make way for more stimulus(that story also dutifully carried on ZH) that has turned out to be completely fake.

same with the constant streams of criticism against Germans for "enjoying the priviledges' of a unified Euro and 'holding Europe back' with austerity and not allowing the ECB to print, painting Germans as ungrateful recipients of the 'Euro windfall' who are hurting other Europeans nations by not allowing more 'stimulus' measures through the ECB. God the Germans are so evil you can smell it!

 

It's really sickening when you see how much the Mainstream financial media is completely one-sided in their propaganda efforts to promote more 'stimulus' and paint any nation against or hesitant about 'stimulus' as either 'on the verge of crashing - so they MUST stimulate' or 'ungrateful, wrong and holding others back - so others should rebel against them and STIMULATE'

But if you need any further evidence that the MSM is all just one giant propaganda loop talking for the exact same interest groups(banks and corporate owners), it doesn't get any more obvious than this.

Thu, 11/06/2014 - 23:06 | 5422351 Callz d Ballz
Thu, 11/06/2014 - 23:45 | 5422491 FieldingMellish
FieldingMellish's picture

You can cut the tension in the air with a knife. Gold just about ready to take a DEEP plunge under $1100. JPY itching to head to 120. USD being pulled up to 90. EUR down to 1.20. Silver wants to take out $15.00 tomorrow. Oil to under $75. NFP will be the trigger. Huge 250K+ print. Stawks to blast to even higher highs.

Fri, 11/07/2014 - 00:57 | 5422664 Consuelo
Consuelo's picture

Stack...   There is not a whole lot more time left on the perversity clock before the spring breaks.

Fri, 11/07/2014 - 00:14 | 5422575 fibonacci's claus
fibonacci's claus's picture

is it true that asian women have an extra muscle in their vagina?

i say go for the jade, extra muscle landing

Fri, 11/07/2014 - 02:32 | 5422776 tarabel
tarabel's picture

 

 

If you ever heard one of them rag on their husband, you would assume that the extra muscle is in their mouth.

Fri, 11/07/2014 - 03:01 | 5422795 synopsisTODAY
synopsisTODAY's picture

Turn off the lights, you two... hey! What you doing to my dog!

Fri, 11/07/2014 - 09:00 | 5423086 Otto Zitte
Otto Zitte's picture

Indians in arranged marriages use guilt and shame much more effectively. Those men live lives of quiet desperation...

Fri, 11/07/2014 - 12:32 | 5423881 Ariadne
Ariadne's picture

If men could divorce with equal privilege as women... ahahaha

Fri, 11/07/2014 - 02:13 | 5422750 tarabel
tarabel's picture

 

 

So let me get this straight...

China just pumped $126 B into its economy in two months, or an average of $63 B a month compared to the Fed $85 B a month in QE.

Yet this is not QE. Why? Because China says so, and if you ever want an entry visa into the country, you'll agree with everything they tell you or else.

Since China's economy is much smaller than the US, this new Potemkin QE program is actually much larger on a percentage basis.

What does this QE mean? It means that China is in trouble. What does the propaganda campaign to hide it mean? It means that China is in bigger trouble.

In this corner, the former Empire of Japan printing money like there is no tomorrow.

And in this corner, the wannabe restored Empire of China loaning money in world shattering numbers to decrepit, collapsing industries but pretending that it is actually being very prudent and stingy.

Who will get to the soup line first? Stay tuned for further imaginary communiques.

Fri, 11/07/2014 - 02:31 | 5422775 yerkiddinrite
yerkiddinrite's picture

renewable life. What are you? Retarded??? You post here on ZH and yet still have no fucking clue.

Obama is printing??? Obama will let the collapse come????

Fuck me, You Stupid Shit. Go wank yerself 

Fri, 11/07/2014 - 07:51 | 5422973 Renewable Life
Renewable Life's picture

Let me be more articulate Dumbfuck, the whole American Economy is a fucking deficit spending orgy of EBT cards and corporate welfare programs, entitlements, and Fed pumping!

The Fed just paused, now it's the federal budgets turn to pause, Obama will use his little veto pen and bring the monster to a halt (temporarily of course) to punish the non believers in socialist statist Kenyensian economics!!

More clear dipshit, or are you one of these delusional new red team blue team arrivals to ZH, who believes in this fantasy bullshit, and let me guess the GOP will save us all now!

Fri, 11/07/2014 - 04:24 | 5422834 vyeung
vyeung's picture

Thing with the above is that it does not take into consideration the new silk road, Eurasia trade zone, African trade etc. Whilst the west wages war, the east is doing more business. These so called analysts will be proven drastically out of synch!

The world's simply does not revolve around the US anymore, they seriously need to factor that in.

Fri, 11/07/2014 - 13:41 | 5424195 yerkiddinrite
yerkiddinrite's picture

ok renewable life.Maybe there might be som hope for you cause of your first paragraph.

Of course it;s a spending orgy...Duh!

But your second paragragh is pure crap,rediculous out there sophmoric supposition that is meaningless.

Your 3rd paragragh shows you have no reading comprehension.None.

I originally blasted you cause your thinking goes to places that are 3rd grade level at best,and now you just did it again.

Pfft.

Fri, 11/07/2014 - 22:00 | 5426135 Quaderratic Probing
Quaderratic Probing's picture

Tied to USD they cant play much.

Do NOT follow this link or you will be banned from the site!