China warns "the outside world doesn't get it, we do," in a statement related to the "stealth QE" they unleashed yesterday, noting investorsd "do not realize that today's Chinese economy is moving towards "new normal" in the process," and "need to accept the volatility of economic data," during this transition. Crucially, PBOC adviser Chen Yulu clarifies what Western central banks simply cannot grasp: "Hoping for stimulus policies in the face of increased economic pressure is short-sighted and does no good to long-term economic development," warning investors should not expect "strong stimulus." Wall Street is less than exuberant about the liquidity injection, as the impact on real economy may be limited due to lenders' risk aversion.
As Xinhua reports,
China should stick to prudent monetary policy even as its economy faces “relatively large” downward pressure, Xinhua reports, citing PBOC adviser Chen Yulu.
- China should not cut interest rate as long as it can avoid it, Chen says
- China has plenty of fine-tuning tools to maintain M2 growth at about 13%
- China shouldn’t adopt “strong stimulus,” Chen says
- China has targeted RRR cut, open market operation tools
- Chen hopes China can introduce deposit insurance by year-end
Calls for stimulus policies including interest rate cuts following negative economic data suggest a lack of faith in China’s reform efforts, Xinhua News Agency said in an unsigned commentary in Chinese yday.
- Hoping for stimulus policies in face of increased economic pressure is short-sighted and does no good to long-term economic development: Xinhua
- China has enough tolerance and policy tools to deal with economic slowdown: Xinhua
And Wall Street, while happy it happened in the short-term, is less sanguine about the impact in the future... (via Bloomberg)
PBOC’s reported liquidity injection is aimed at addressing seasonal swings in cash availability, while impact on real economy may be limited as lenders turn risk-averse, analysts say.
- Monetary easing is moving in the “wrong direction”; quantitative easing so far this year has yet to bring down borrowing costs
- PBOC should still lower interest rates to spur investment and consumption
- PBOC is likely preempting a seasonal surge in demand for cash, especially since recent increase in FX inflows has been poor despite record trade surpluses; may also aim to buffer negative impact from recent CBRC rule on deposit deviation
- Liquidity provided to five big commercial banks that are less constrained by loan-deposit ratios would make it easier to increase credit supply across the board
- Interest rate on standing lending facility likely in 3.5%-4% range
- Liquidity injection may have little impact on continued property downturn, excessive industrial capacity and weak business outlook
- Targeted easing measures since June provide PBOC more flexibility and control in managing monetary conditions and offering short-term liquidity, but impact on real economy and targeted sectors is limited
- Measures may not arrest growth moderation; still sees rate cut inevitable in coming quarters, likely 4Q 2014-1Q 2015
China Merchants Bank:
- Given rising risk-aversion among lenders, liquidity injection may not motivate them to lend
- SLF may be authorities’ last attempt to test new policy measure instead of easing via conventional tools; if it fails to achieve expected results, they may introduce more broad-based easing
- Rate cut would be a more effective tool; will also provide more stable environment for reform
- Move avoids being too aggressive in easing while funding support may come from likely jump in fiscal spending in December when SLF expires
- Tenor of SLF means money more likely to be invested in bonds rather than off-balance-sheet lending
- Rate cut may not be good option; limited rate tool means cut to current benchmark rate may trigger outflow of liquidity from banking sector
- Move may be aimed at providing liquidity before end-Sept. IPOs and likely seasonal cash squeeze; use of SLF instead of reverse repos shows PBOC wants to avoid sending a “too-loose” signal in its monetary stance
- Putting cash into big lenders’ pockets is a way of pushing commercial banks not to hoard cash; big banks are likely to buy more long-end bonds to help push down funding costs
- Size of injection equivalent to broad-based RRR cut of 50 bps, and this is the first time PBOC has used SLF since Feb.
- “A slew” of other easing and stimulus measures may be announced in coming weeks, likely including lowering mortgage rates and easing the loan-to-deposit ratio
- Chances of universal RRR cut or rate reduction have shrunk, especially given a Xinhua article saying that calls for a rate cut suggest a lack of trust in reforms
- If news of injection confirmed, bonds may rally and swap curve will go down, especially front end
- While this injection is bigger than the SLF conducted in the first quarter of 340b yuan, considering upcoming IPOs and the national holiday, the immediate liquidity impact may not be as big as it seems
Credit Agricole CIB:
- Targeted measures may be capping rates, and impact is likely to be seen more at front end of swaps, while any reaction on tenors beyond two-year may not be sustained
- CNY repo-IRS curve is likely to steepen across 1-2 year or 1-3 year segments
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As Chen concludes:
"Strong regulatory reform + clever" policy model is becoming the new normal in China's economy to maintain the development of "stabilizers" to achieve China's promised steady growth, pro-reform, structural adjustment, benefit people's livelihood.
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It appears Iron Ore prices are not buying the exuberance...