For the first time in 3 weeks, the PBOC un-tapered and added CNY 29 billion liquidity (via reverse repo). Despite the Chinese governments denial of any liquidity crisis, the decision to “fold” reflects a clear indication that, as Monex strategist Eimear Daly notes, “China’s attempting to incrementally liberalize markets and to allow instabilities to unwind with minimal damage; and spikes in interbank lending rates show authorities are struggling to manage this task.”
The liquidity was provided at 4.1% (not a particularly low rate but overnight repo is well off the highs of the last week) but 7-day repo rates (though down 3.5%) remain high at 5.5% (150bps above the ‘normal’ levels of July to October).
The night is young though as we suspect, just as yesterday, the big banks will soak up the first juice and leave the small banks (who need the most) floundering…
As Eimear Daly adds,
Under govt-protected financial markets, instabilities build up: a property market bubble, unprofitable lending, severe overcapacity and high levels of private and local govt debt
Taking the economy from govt control to unrelenting scrutiny of financial markets involves a shock
Even if China manages to bring its economy onto a slower growth path with limited turbulence, it will weigh on growth across EMs