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China's central bank acts to avert short-term credit crunch China's central bank acts to avert short-term credit crunch
(about 11 hours later)
China's central bank has announced an emergency injection of liquidity into financial markets to avert a short-term credit crunch.China's central bank has announced an emergency injection of liquidity into financial markets to avert a short-term credit crunch.
The People's Bank of China has been progressively tightening financial conditions over recent months to rein in excessive lending growth in the economy, and had cancelled its usual daily "open market operations" – which push money into the markets – in recent days. The People's Bank of China has been progressively tightening financial conditions over recent months to rein in excessive lending growth in the economy. But analysts said the unexpected short-term liquidity operation (SLO) was an indication of the challenges facing Beijing as it seeks to shift to a more sustainable growth model.
But as a result, interbank lending rates – a key measure of market stress – had shot up, raising fears of a crunch. As part of its clampdown on credit growth, the central bank had cancelled its usual daily "open market operations" – which push money into the markets – in recent days.
Echoing similar measures it took in June, the People's Bank of China took the unusual step of announcing, via Weibo, the Chinese equivalent of Twitter, that it had carried out a short-term liquidity operation, or SLO. Trading was also extended by an extra half an hour, to allow banks to benefit from the measure. But as a result, interbank lending rates, a key measure of market stress, had shot up, raising fears of a crunch.
No details were published about the scale of the SLO, or which banks had been involved; but the liquidity injection evoked memories of the crisis measures taken by central banks in Europe and the US in the wake of the collapse of Lehman Brothers, as markets threatened to dry up. Echoing similar measures it took in June, the central bank took the unusual step of announcing, via Weibo, the Chinese equivalent of Twitter, that it had carried out an SLO. Trading was also extended by an extra half an hour, to allow banks to benefit from the measure.
Mark Williams, of consultancy Capital Economics, said: "The story of the past few months has been that the PBoC wants to tighten monetary conditions to slow credit growth, and that's been happening in fits and starts." No details were published about the scale of the operation, or which banks had been involved, but the liquidity injection evoked memories of the crisis measures taken by central banks in Europe and the US in the wake of the collapse of Lehman Brothers, as markets threatened to dry up altogether.
Diana Choyleva, China expert at Lombard Street Research in London, said the run-up in interbank rates suggested that the major financial reforms Beijing announced at the policy Plenum last month are likely to be disruptive in the short-term, as banks wrestle with the legacy of years of over-investment. Mark Williams of consultancy Capital Economics said: "The story of the past few months has been that the PBoC wants to tighten monetary conditions to slow credit growth, and that's been happening in fits and starts."
"Since the Plenum the PBoC have been tightening; but they're not there to tank the whole thing, so as and when, they have to intervene to alleviate a particular pressure," she said. "I would argue for reform to be successful, there's no way you can do it without going through short-term pain." Diana Choyleva, China expert at Lombard Street Research in London, said the rise in interbank rates suggested that the financial reforms Beijing announced at the policy plenum last month are likely to be disruptive in the short term, as banks wrestle with the legacy of years of over-investment. China pumped billions of dollars of lending into its economy to prop up growth in the wake of the global financial crisis. But as the central bank acts to rein in the bubble, there are fears that some debt-laden banks and companies may be vulnerable as borrowing costs rise.
While markets in much of the world have been fixated on the Federal Reserve's decision to being "tapering" its $85bn a month quantitative easing programme, China's relatively closed markets mean it has so far felt little impact from the announcement late on Wednesday. "Since the plenum the PBoC have been tightening. But they're not there to tank the whole thing, so, as and when, they have to intervene to alleviate a particular pressure," Choyleva said. "I would argue that for reform to be successful, there's no way you can do it without going through short-term pain."
"China's financial system is by and large walled off from the rest of the world," said Williams. She added: "China needs reform now, and if they don't do it, there will be a major financial crisis in two or three years' time." She singled out Beijing's high-profile drive against corruption, and the central bank's recent determination to show banks that they will have to live with higher borrowing costs, as evidence that the current regime is committed to shifting the economy to a more sustainable footing.
While markets in much of the world have been fixated on the Federal Reserve's decision to being tapering its quantitative easing programme, China's relatively closed markets mean it has so far felt little impact from the announcement late on Wednesday. "China's financial system is by and large walled off from the rest of the world," said Williams.
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