From FTAlphaville overnight:
The PBOC conducted a 255 bn yuan ($42 bn) liquidity operation on Tuesday, causing money market rates — which had been running very high — to drop significantly.
As Bloomberg noted:
The seven-day repurchase rate, a gauge of interbank funding availability, dropped 88 basis points to 5.44 percent in Shanghai, according to a daily fixing compiled by the National Interbank Funding Center. It surged 153 basis points yesterday, the most in seven months. The Shanghai Composite Index climbed 0.9 percent today, after closing below 2,000 yesterday for the first time since July.
Given that liquidity serves the needs of the shadow banking sector — which the authorities have promised to rein in — questions abound as to how generous the PBOC is likely to be from now on. On one hand pandering to the shadow banking sector’s liquidity encourages moral hazard and more risky activity, on the other hand being too stingy risks a US-style shadow banking run that could make the 2008 crisis look like a walk in the park in comparison.
A tweet on Weibo from the PBOC earlier on Tuesday, however, gives us a clue to the conditionality of the liquidity being offered:
[in responding to questions] ‘eligible collateral for the PBoC SLF does not include credit/loan assets [i.e. dodgy stuff], only high-quality assets such as PBoC bills, policy bank bills and highly-rated corporate paper are accepted‘.
Very similar liquidity distribution terms were provided to western markets in the lead up to the 2008 crisis as well. In hindsight, it’s fair to state western central banks were probably too slow to recognise the market’s lack of “quality assets” to cover its liquidity needs. It wasn’t until central banks dropped collateral standards, or began to swap quality assets into the system in exchange for lower quality assets, that the liquidity injections really began to make a difference.
But by that point it was too little too late for many banks in the system.
Maybe so but you can’t be shoving them on such liquidity support in advance of the crisis can you? Not unless you nationalise and/or shut down a whole lot of them in the process. But you can’t do that unless there’s a crisis. There’s not much more to say for Australians than to say pray it doesn’t come to that.
