China’s central bank has drained Rmb48bn ($7.9bn) from money markets, an unexpected move that signals its concern with the boom in lending at the start of the year, writes Simon Rabinovitch in Shanghai.
The People’s Bank of China withdrew the cash by issuing 14-day bond repurchase agreements. It was its first time using repos to drain liquidity from the money market in eight months.
The central bank typically gauges demand from banks the day before conducting open-market operations, but on this occasion it issued the repos without advance warning, traders said.
The Shanghai Composite, China’s main stock index, fell 0.8 per cent yesterday after rallying over the past week.
The drain follows a jump in bank and shadow bank lending in January. New local-currency loans reached Rmb1.32tn last month – nearly triple December’s total, Rmb200bn more than market expectations and the highest monthly total since January 2010.
It is customary for banks in China to lend most heavily at the start of the year, but the numbers this January were unusually strong. Chinese money conditions have been volatile over the past six months, sowing doubts about whether Beijing is more focused on reining in credit or supporting growth.
A cash crunch in June and a smaller echo in December appeared to show that the government was intent on tightening liquidity, but the lending surge in January following a series of short-term cash injections ran in the opposite direction.
Analysts said yesterday’s cash withdrawal indicated that the central bank did indeed have a tightening bias, albeit a mild one.
“It shows that the PBoC views current market liquidity conditions as over-relaxed,” said Zhou Hao, an analyst with ANZ. “The central bank’s tendency is to maintain generally tight liquidity conditions.”
The seven-day bond repurchase rate, China’s most important measure of short-term liquidity, had spiked towards 10 per cent after the cash crunch in June and a smaller one in December. But on Monday, it fell below 4 per cent, a level that the central bank appears to have judged to be excessively low.