SHANGHAI: The People's Bank of China (PBoC) held back from liquidity operations for the second day running on Tuesday as regulators show signs of concern that loose liquidity might be fuelling another round of risky credit expansion.
Short-term money rates have slid steeply since the end of the third quarter, with the weighted-average benchmark seven-day repo rate down nearly a full percentage point over the last eight trading sessions.
The Shanghai Interbank Offered Rate (SHIBOR ) posted a similar decline.
Traders and economists believe current easy liquidity conditions are in part a gesture from the central bank following a credit crunch it engineered in the interbank market in late June that saw some short-term rates quoted as high as 30%.
The move was widely seen as a warning to banks to rein in riskier lending.
The rate spike was short-lived but caused a market panic nevertheless, and the PBoC appeared to have been admonished by the central government for the opaque way in which the cash squeeze was managed.
Now, however, economists are worrying the PBoC may have gone too far in the opposite direction.
China's economy grew at its quickest pace this year between July and September in a rebound fuelled largely by investment, but signs are emerging that rebounding credit expansion might cause inflation to rear its head again even as the recovery runs into fresh headwinds.
Annual consumer price inflation in September picked up to a seven-month high of 3.1%, from 2.6% in August. Data on Tuesday showed new housing prices rose 9.1% in September from a year earlier, marking the ninth straight month of year-on-year increases.
Song Guoqing, an adviser to the Chinese central bank, was quoted in the official China Securities Journal on Monday as saying that the central bank might tighten monetary policy in the fourth quarter.
"A slowdown in growth in the fourth quarter would probably reawaken fears of a hard landing but we would welcome it," wrote Mark Williams and Julian Evans-Pritchard of Capital Economics in a research note.
"A prolonged surge in credit-fuelled investment is the last thing China now needs."
Chinese banks made 787 billion yuan’s (US$129.18bil) worth of new loans in September, higher than a forecast of 650 billion yuan and more than August's 711.3 billion yuan, central bank data showed.
At the same time, yuan have also poured into the market as a side effect of massive interventions by the central bank intended to keep a long-running yuan rally from getting out of hand.
The current easy liquidity conditions have also been supported by funds flowing into the market from other sources.
Fiscal deposits from the Ministry of Finance flowing into the banking system have combined with inbound investment flows chasing the rising yuan to pour cash into the interbank market over the last quarter, said a trader at a city commercial bank in Shanghai.
"Overall sentiment is still good. I think the central bank is acting the way it should, not letting liquidity get too loose."
WAIT AND SEE
The bank will have another opportunity to inject funds – or drain additional funds – on Thursday if it sees the necessity. Traders said they believe the PBoC is taking a wait-and-see attitude.
The seven-day repo contract remained in accommodative territory on Tuesday morning, with the weighted average rate at 3.56%. Other short-term tenors similarly remained in the 3% territory, which traders consider indicative of comfortable money conditions.
Maturing reverse repos will drain a net 58 billion yuan from the banking system this week, which will be adjusted by any injections or drains conducted during the week's second round of open market operations on Thursday, if any.
The PBoC conducted a net drain of 44.5 billion yuan from the banking system last week, skipping open market operations during the previous session last Thursday – Reuters.
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