Government 'has some tolerance' for liquidity squeeze: experts
China's interbank market experienced a liquidity squeeze in October, sparking fears of "monetary famine," while the government has been injecting capital into the domestic financial market in recent days.
Experts noted on Thursday that the government "has some tolerance" for the tightening liquidity level, for various reasons including an attempt to regulate domestic overheating real estate market.
One important barometer of liquidity in the domestic financial market, the Shanghai Interbank Offered Rate (Shibor), has been sending out signals of tightening liquidity. On Thursday, the seven-day Shibor rose by 0.2 basis points to 2.411 percent while the 14-day Shibor increased by 0.4 basis points to 2.570 percent.
Shibor is a daily reference rate that measures the cost for banks borrowing among themselves in the Shanghai interbank money market. A rising Shibor signifies that the domestic credit market is seizing up due to short-term capital scarcity.
Depreciating yuan
Xi Junyang, a professor in the Department of Finance at the Shanghai University of Finance and Economics, said that a major reason for the tightening liquidity is the depreciating yuan.
"As the yuan has slumped against the U.S. dollar in recent weeks, the central bank has had to sell dollars to buy yuan in order to support the currency. This has caused liquidity conditions to tighten in the markets," Xi told the Global Times Thursday.
The yuan's central parity exchange rate against the U.S. dollar depreciated 31 basis points to 6.7736 on Thursday. China's currency hit a six-year low of 6.7744 on Tuesday, but climbed slightly on Wednesday.
Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, said that the trend of the slumping yuan has been much evident in recent weeks, which might have stimulated capital outflows.
According to data from the People's Bank of China (PBOC), China's central bank, yuan funds outstanding for foreign exchange, an important barometer of capital flow, dropped for the 11th consecutive month to 22.91 trillion yuan ($3.38 trillion) in September, indicating capital outflow.
However, Zhou noted that how capital outflows actually affect the liquidity status in China is hard to say. "I would say the scale of capital outflow is not that big in China, and it only has a limited impact on the domestic liquidity level," he said.
Xi suggested there might also be other reasons for the tightening liquidity on the interbank market. "For example, some small banks might have a strong willingness to lend much loans, causing a short in their capital reserves," he explained.
Insufficient tools
To deal with insufficient liquidity, the PBOC has been injecting money into the domestic financial markets in recent days.
On Thursday, the PBOC offered three reverse repurchase agreements (repos) that amounted to 210 billion yuan, according to a statement on the PBOC's official website. The PBOC had already offered three repos worth 210 billion yuan on Wednesday and three repos of 235 billion yuan on Tuesday.
In a repo agreement, the PBOC buys securities with the proviso that it will resell these same securities to the same seller for an agreed-upon price. It is a method by which the PBOC lends short-term capital to commercial banks.
According to Xi, the fact that liquidity is tightening in the domestic financial market shows that the PBOC's money replenishment channels have not been used sufficiently.
Zhou stressed that the PBOC has the capacity to offset the influence of capital outflows and other factors on liquidity status by its short-term money supply channels. "Either it takes time for the effects of those methods to manifest, or the government wants to control the liquidity level to regulate the heating property market," he noted.
Domestic house prices have surged in some Chinese cities recently, forcing the government to roll out measures to cool down the property market. "High liquidity might cause the real estate bubble to burgeon further," Zhou said.
Xi also said that apart from short-term money supply channels, the government can also cut the banks' reserve requirement ratio as a way of monetary easing. "But they wouldn't do that as the major economic indicators in China have not shown any evident signs of deterioration," Xi noted.
China saw a GDP growth of 6.7 percent in the third quarter, the same as the first and the second quarters, data from the National Bureau of Statistics showed in October.
Xi also stressed that the tightening liquidity on the interbank market is usually temporary. "The PBOC normally wouldn't largely increase money supply because of 'capital famine.' They have some tolerance for the current liquidity level," he said.
