PBoC: Market’s tightening is doing the job - Natixis

Alicia Garcia Herrero, Research Analyst at Natixis, explains that although the market’s tightening is doing the PBoC’s job, they do not think the PBoC is having such an easy life in 2017 as it may seem at first instance as the quest of deleverage may look more difficult and costly than previously expected, at least in terms of high real interest rates, which even could derail the currently positive economic situation.

Key Quotes

“The PBoC is always burdened with multiple policy objectives but so far it is managing them quite well. Ushering into 2017, things are generally palatable for the world’s second-largest economy, with a much stronger real economy and, more recently, a seemingly strong currency and renewed accumulation of reserves.”

“Given the sweet spot the PBoC seems to find itself in, after two terrible years – is there anything else the PBoC may wish for? The answer to us, very clearly is a natural deleveraging process without major consequences.”

“There are increasing signs, however, that this wish might not be easily attainable. After an unsuccessful attempt to close the liquidity tab, the PBoC is back with massive injections, but SHIBOR has not stopped creeping up, if anything the trend has only accelerated.”

“We argued there are two key reasons for the stubbornly high market money market rates in China beyond the PBoC’s actions. The first is the increasing importance of shadow banking in China’s financial system which is behind the very large reduction of deposits in Chinese banks and the increasing dependence on wholesale funding.”

“Second, the massive capital outflows have drained a large amount of liquidity from the banking system.”