Policy shift could spell trouble for stock, property markets: analysts
(SHANGHAI) A massive squeeze in China’s money market suggests the authorities are getting serious about reining in soaring asset markets to control inflation.
Funding squeezes have occurred a few times this year in response to initial public offers of equity and seasonal demand for money. But the current drought of funds is much harsher than previous ones and is set to last longer.
In contrast to past squeezes, this one is largely the result of initiatives by the authorities to cool the stock market and reduce the amount of funds available for bank lending, much of which is going into the property market.
In the past, the central bank balanced supply and demand for funds more carefully to limit spikes in short-term interest rates. This time, rates have largely been left to soar unchecked as the authorities soak up money from the market.
‘Authorities are shifting their focus to the stock market and to commercial banks’ lending growth, while putting less focus on short-term volatility in money market rates,’ said Chai Cipeng, a fixed-income trader at Daiwa SMBCSSC Securities in Shanghai.
The shift in policy priorities could spell trouble for the stock and property markets in coming months. It could also mean a difficult time for Chinese fixed-income investors until stock and property prices finally show signs of cooling down.
The weighted average seven-day repo rate, a key measure of short-term liquidity, surged to a multi-year high of 6.6942 per cent yesterday – far exceeding this year’s previous peak of 4.77 per cent, hit in April.
Because the squeeze is expected to last until early October, when money will return to banks after a long holiday period, the average one-month repo, usually more stable, also jumped yesterday, hitting a multi-year high of 7.2092 per cent against this year’s previous peak of 4.45 per cent.
Trade in bills and bonds almost halted this week as desperate banks lack the money to trade. While the central bank has reduced money market draining operations, the resulting net injection is dwarfed by the hundreds of billions of yuan that the market is being required to provide.
Net injections of that scale are ‘not enough in this environment’, said Shi Lei, an analyst at Bank of China.
The squeeze is largely due to the planned sale of big volumes of special bonds to the market this month, a form of monetary tightening, and by record IPOs in quick succession from China Construction Bank and Shenhua Energy, part of efforts to cool the stock market by boosting supply of equity.
The steps are being taken just a week after China announced August consumer price inflation jumped to a 10-year high of 6.5 per cent from July’s 5.6 per cent.
Source: Reuters (Business Times 21 Sept 07)