China bails its banks

From the ANZ last night:

PBOC released a statement on its website tonight to talk about recent market liquidity tightness, and the major points are as follows:

The overall liquidity conditions are relaxed, and the commercial banks are holding RMB1.5trn excess reserves in the central bank as of 21 June, compared with normal level of RMB1.0trn;

PBOC admitted that it has already provided liquidity to some financial institutions in the past few days, indicating that the central bank could have already used the short-term liquidity operations (SLO) which was introduced in January for the first time, to ease the market liquidity tightness;

The PBOC will continue to use a few instruments including SLO to support the financial institutions, and expects that the market liquidity conditions will gradually ease;

Big banks should help stabilise the market and report the important and urgent issues to the central bank in a timely manner;

The banks should reasonably arrange the assets and liabilities, and the central bank will give liquidity support if there is temporary liquidity shortage;

The SHIBOR price quotation contributors should honor its offering prices, and the market makers must not mislead the market via fake deals.

ANZ ASSESSMENT

It is clear that PBOC has fine-tuned its tone to ease the liquidity tightness. In this case, the market interest rates are likely to decline significantly in the remaining week, which will help stabilize the market and the real economy.

We view this as a positive move by the central bank to communicate to the market. As we have pointed out in our previous research note, the PBOC needs to act pre-emptively to ease the market liquidity conditions. One of the reasons for the current liquidity tightness in the interbank market was that commercial banks have become more cautious on lending to each other amid rising uncertainties. As the PBOC clearly states that it has already provided and will continue to provide liquidity support to some banks, this will greatly improve the market’s confidence.

The ANZ China chaps are a positive bunch. This development eases the tail risk of a major Chinese bank freeze (which is great news) but it doesn’t in any way mean that the PBOC isn’t engaged in slowing shadow credit. On the contrary, the selective support and refusal to cut any significant benchmark rate (that’s what the ANZ guys have been demanding) is evidence that the Chinese are very serious about slowing credit. The likelihood of another step down in the Chinese growth rate later this year remains.