Spike in China money rates raises cash-crunch fears

October 24, 2013 5:32 am

Spike in China money rates raises cash-crunch fears

By Simon Rabinovitch in Shanghai

China’s money rates shot up on Thursday after the central bank withdrew cash from the financial system, fuelling worries that the world’s second-biggest economy might see a replay of a liquidity squeeze that rattled global markets earlier this year.The seven-day bond repurchase rate, a key gauge of short-term liquidity in China, opened at 5 per cent, a four-month high and up 150 basis points from the end of last week. But analysts said concerns of a cash-crunch redux were premature, with tightening moves by the central bank only mild so far and in large part directed at counteracting big inflows of cash from abroad.

“We believe the central bank is just doing a little tightening on the margins and that overall it is maintaining a neutral stance in monetary policy. It won’t lead to a big surge in interbank lending rates,” said Peng Wensheng, chief economist of China International Capital Corp.

In June when the central bank drained money from the Chinese economy, interbank rates briefly spiked to double digits and the gears of the financial system gummed up before it intervened again with targeted cash injections.

Since then interbank rates have stabilised at relatively low levels, but a big jump in credit issuance in recent months and hefty capital inflows from abroad have led investors to brace for another round of policy tightening by the central bank. The People’s Bank of China hinted that this might be coming last week when it said credit growth had been on the fast side.

It followed up this hint by withdrawing a small amount of cash from the financial system. By refraining from conducting open-market operations for three consecutive sessions, the effect will be a net drain of Rmb58bn ($9.5bn) from the interbank market this week as previously issued bills mature.

That withdrawal has been the biggest factor in driving up money market rates. Analysts also cited other technical causes, including tax payments owed by banks this week and a new trading system in the interbank market.

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After opening at 5 per cent, the seven-day repo rate quickly eased back to 4.7 per cent, a sign that the market was well supplied with cash in spite of the central bank’s withdrawals. “With the sudden jump, we expect the central bank will take actions to stabilise rates,” Lu Ting, an economist with Bank of America Merrill Lynch, said in a note.

Beyond the jitters in the money market, there were reassuring indications of the underlying strength of the Chinese economy on Thursday. The HSBC flash PMI, a preliminary version of a closely watched manufacturing survey, rose to a seven-month high of 50.9 in October from 50.2 last month. Readings above 50 signal an expansion of activity.

“This implies that China’s growth recovery is becoming consolidated into the fourth quarter following the bottoming out in the third quarter. This momentum is likely to continue in the coming months,” said Qu Hongbin, an economist with HSBC.

 

October 25, 2013 4:57 am

China liquidity worries weigh on Asian bourses

By Patrick McGee in Hong Kong

Friday 04:15 BST. Asian bourses failed to extend the momentum seen in the US, as concerns of a liquidity squeeze in China continued to weigh on markets.

Hong Kong’s Hang Seng index and the Shanghai Composite were each down 0.2 per cent, shrugging off a rise of 0.3 per cent for the S&P 500 in New York. Over the past five days, mainland Chinese companies listed in Hong Kong have tumbled nearly 4 per cent because of nervousness about China’s banking system.

The People’s Bank of China “seems to have adopted a tightening stance, which could be due to rising inflationary pressures, [the] re-emergence of shadow banking as well as strong capital inflows,” wrote Liu Li-Gang, chief economist for Greater China at ANZ.

Responding to a sharp increase this week in short-term money market rates, investors are worried the PBoC may again repeat the “cash crunch” seen in June, when interbank lending rates soared as China regulators cracked down on shadow banking.

The seven-day repurchase rate – the rate at which the People’s Bank of China lends to commercial banks, and an important gauge of short-term liquidity – touched a four-month high of 5 per cent on Thursday after the central bank once again refrained from conducting reverse repos.

The rate was again above 5 per cent on Friday, versus less than 3.5 per cent just a week ago. But analysts have pointed out that it remains well shy of levels of about 30 per cent that were seen in June.

“We believe that the ‘cash crunch’ is unlikely to be repeated again as the PBoC should have learnt that an overly tightened liquidity will bring about serious systematic malfunction,” said ANZ’s Mr Liu.

In Japan, the Nikkei 225 index was down 1.2 per cent partly in reaction to consumer price data showing the pace of increase in core prices decelerated for the first time in six months.

A key to the “Abenomics” economic growth programme is hitting 2 per cent inflation within two years. Signs that inflation may have peaked are not welcome.

“The main factor for the deceleration was a smaller positive contribution from the energy prices on the back of waning gasoline prices,” noted economists at Credit Suisse.

Investors were also still unsettled by Thursday’s report from Japan’s Cabinet Office in which it kept its outlook for the economy steady but downgraded its assessment of exports for the second straight month.

Barclays said the report underscores “the drag on the economy due to export weakness, especially to Asia.”

Japanese stocks are on pace to lose 1.7 per cent for the week, ending a two-week winning streak.

In South Korea, the Kospi Composite was down 1.1 per cent despite data showing theeconomy grew at a faster-than-expected 3.3 per cent annual clip in the third quarter.

Economists at ANZ said the positive report doesn’t change Korea’s medium-term outlook, which is clouded by a nine-month high for the currency and moderation in global demand.

Samsung Electronics, which makes up nearly a fifth of the Kospi, failed to lift the market even after confirming record third-quarter earnings, which were largely telegraphed in the technology company’s guidance earlier this month.

Australia continued to outperform. The S&P/ASX 200 was up 0.3 per cent, on pace for its seventh daily gain in eight sessions. Gold miners were among the leaders after gold futures climbed to a one-month high of $1,350 per ounce overnight St. Barbarawas up 4.4 per cent and Silver Lake Resources was up 3.5 per cent.