China Repo Rate Surge Continues As PBOC Refrains From Liquiidty Injection For Third Auction

The reason why the Chinese Shanghai Composite again can't catch a bid (and why the Baltic Dry is sliding and will continue sliding from recent highs) is the same as the main event yesterday: the concerns that while the Fed punchbowl is and will continue to be filled beyond the point of overflowing, China - where inflation has once again taken a turn for the worse as it did this summer when after much repo pain the PBOC killed it early on in order to not repeat the scary episode of 2011 - may be actively engaging in monetary tightening. And like yesterday, when the PBOC refrained from adding liquidity via reverse repos, so today for a third straight auction the Chinese Central Bank refused to inject short-term funding into the system. The immediate result: China’s one-month Shibor rose 59 bps, most since June 25, to 5.4000%; three-month Shibor rose to 4.6876% from 4.6843% yesterday, while the key 7-Day Repo Rises 63 Bps to 4.68% hitting 5% prior, which was the biggest jump since July.

This move quickly prompted the sellside brigade to whip out the heavy "move along, all is well" artilery with the following opinions, via Bloomberg, on the repo rate surge:

Nomura

  • Current rise in 7-day repo rate is a signal for monetary-policy tightening as Chinese government could have adjusted its liquidity management to offset seasonal factors and avoid rise in repo rate
  • Doesn’t expect a repeat of liquidity squeeze seen in June, and tightening expected to be done in a gradual manner


Morgan Stanley

  • Back end of RMB money market curve has remained calm, marking important difference to early summer event when China rates moved higher across maturity spectrum
  • While combined action of pushing front-end rates and yuan higher suggests tighter monetary conditions, policy tightening action is moderate compared to spring experience


BOT-Mitsubishi UFJ

  • China’s monetary tightening concerns ease, with 7-day repo rate still not at an unusually elevated level
  • Investors appear more comfortable that repo rate surge is unlikely to signal a shift to tighter monetary policy; Chinese authorities appear comfortable with their current policy stance as inflation remains below 3.5% and real GDP growth is on course to modestly exceed their 7.5% target in 2013

The question is just how far will the PBOC go again this time: back in June it took several weeks of reverse repo auction lapses before the 7 day SHIBOR exploded well into the double digits, which in turn crippled the hot money flows. Will the PBOC simply repeat this exercise once again, and will it be as "successful" as it was last time, or will something finally break this time?

As for the other, less relevant news out of China, the flash HSBC printed at 50.9, between the final September 50.2, and flash reading of 51.2. Below is SocGen's take:

The flash reading of the HSBC manufacturing PMI came in better than expected at 50.9 in October (Cons. 50.4; SG 50), in-between the final reading of 50.2 and the flash reading of 51.2 in September.

 

Simply compared with the final report for September, there were notable improvements with most key sub-indices. Output rose to a six-month high of 51 from 50.2; new orders were up by 0.8 point to 51.6, a seven-month high; purchases of inputs climbed above 50 for the first time in nine months; and employment increased to 49.9 from 48.8. Export orders were fairly resilient but did not increase much: 50.8 after 50.7. However, the two price indices - input and output prices - both retreated from the final readings in September, which points to slower improvement in the producer price index ahead.

 

Given the big difference between the flash and the final last month, it is somewhat difficult to judge the magnitude of the improvement, although the levels of these PMI readings suggest that the growth momentum of smaller manufacturing firms, at least, held up in October.

 

However, seeing growth stabilising, policymakers seem to be shifting their focus back to risk management. Beijing's municipal government issued a seven-point property tightening policy on Wednesday. Aside from a reiteration of existing policy, the city plans to offer 70 thousand units of below-market-price apartments in the next two years, which is equivalent to nearly 30% of the housing sales in 2012. Other big cities are likely to follow Beijing's lead to announce property tightening measures in the coming months. At the macro level, the People's Bank of China withdrew nearly 100bn yuan from the interbank market in the past two weeks and as a result, the overnight repo rate is back above 4% and the 7-day rate close to 5%. The leadership still intends to delever the economy, which is the main reason behind our call that the secular deceleration trend is far from over.