China: PBoC enhances scope of MPA – ING

In China, the third quarter PBOC report shows some hints on tightening shadow banking, points out Iris Pang, Economist at ING.

Key Quotes

“Apart from limiting interbank negotiable certificates of deposits (NCD)’s of less than a year’s maturity, the PBoC is preparing to include NCDs in its Macro Prudential Assessment (MPA) from the perspective of interbank business’ asset-liability ratio. The MPA may also include green finance in the future.”

“At the same time, the central bank will change cross border policies to attract more inflows by eliminating reserves on forward contracts that sell USD, as well as eliminating reserves on onshore deposits placed by offshore financial institutions.”

“Overall, it means that the PBoC is following the 19th Congress’s mandate to stabilise the financial sector during the financial sector clean-up. The restrictions and inclusion of NCDs into the MPA are just the first steps to control the growth of shadow banking. We expect more to come. On cross border flows, the central bank is relaxing inflows to net off the slightly relaxed window guidance on outflow. The intention is clear.”

“The central bank would like to have slightly positive net capital inflows so that more foreign investors will hold CNY assets onshore. This is one of the ways to promote RMB internationalisation.”

“Liquidity will continue to trend towards a slightly tighter situation. But the PBoC is ready to jump in to smooth liquidity whenever 10Y sovereign yields jump. So we don’t expect any liquidity crunch in China during the financial deleveraging process.”