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China’s Market News: PBOC Tweaks Short-Term Credit Strategy

China’s Market News: PBOC Tweaks Short-Term Credit Strategy

Renee Mu, Currency Analyst

This daily digest focuses on market sentiment, new developments in China’s foreign exchange policy, changes in financial market regulations and Chinese-language economic coverage in order to keep DailyFX readers up-to-date on news typically covered only in Chinese-language sources.

- The PBOC used 14-day reverse repos for the first time in six months, a move to reduce cheap short-term credit.

- The Shenzhen Stock Exchange requires securities companies to complete all preparations for the new trading link by early November.

- China’s banking regulator imposed caps on Peer-to-Peer borrowing in the effort of curbing moral hazard.

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Sina News: China’s most important online media source, similar to CNN in the US. They also own a Chinese version of Twitter, called Weibo, with around 200 million active usersmonthly.

- The PBOC issued the 14-day reverse repos on August 24th which has a higher interest rate of 2.40% than the 7-day reverse repos of 2.25%. This is the first time that the Central Bank has used 14-day reverse repos since February. The PBOC’s moves have sent out two important messages: A) The odds of China’s Central Bank cutting benchmark rate remains low. B) The Central Bank is curbing the cheap short-term borrowing that has been used to purchase longer term bonds.

Chinese government bond prices are soaring over the past two weeks: the yield of Chinese 10-year government bond fell to 2.656% on August 15th, the lowest level since the end of 2008 (note: bond prices and yields have an inverse relationship). As the short-term borrowing costs are relatively low, investors have taken on 7-day reverse repos and used the money to purchase longer-term bonds and make profits. This may fuel bubbles in the bond market, which is the last thing Chinese regulators want. In fact, in early August, four Chinese top regulators unleased a series of rules designated to curb asset price bubbles and reduce financial risks. Over the past week, the PBOC has been increasing higher-cost credit through Medium-term Lending Facilities (MLF): 520 billion Yuan of MLF added last week has taken up nearly 80% of the total liquidity added. The interest rate of 6-month MLF is 2.85% and the rate of 1-year MLF is 3.00%; both are significantly higher than the 2.25% of 7-day reverse repos.

Following the PBOC’s move on Wednesday, the Yuan’s benchmark borrowing rates in Mainland markets all increased: the short-term rates rose the most, with SHIBOR O/N and 1W both up by +1.00 basis points; SHIBOR 2W and 1M increased +0.90 and +0.16 basis points respectively; SHIBOR 3M, 6M, 9M and 1Y all rose +0.10 basis points.

Hexun News: Chinese leading online media of financial news.

- The announcement from Shenzhen Stock Exchange on Monday gave more clues on the prospective launch time of the Shenzhen-Hong Kong Stock Connect, a long-awaited program. The stock exchange requires that securities companies participating in the program should complete technical preparations by the end of September and complete all the preparations by early November. This adds proof to a likely launch around mid-December. Also, securities companies are required to report to the stock exchange every week, which will help to keep up markets up-to-date with the timeline of the launch.

China Finance Information: a finance online media administrated by Xinhua Agency.

- China’s banking regulator, together with three other state agencies, imposed new rules on Peer-to-Peer (P2P) lending on August 24th. First, regulators define the role of P2P lending: they call it ‘a supplement to the traditional banking system’, rather than ‘a substitution’. This means that despite the fast growth in P2P lending, from the regulator’s point of view, it will not affect the role of the traditional banking system. Also, regulations set ceilings for borrowing from P2P platforms: individual investors are not allowed to borrow more than 200,000 Yuan from a single P2P platform or more than 1 million Yuan from P2P lenders in aggregate; for companies, the caps are 1 million from a single platform or 5 million in aggregate. This will help to reduce the moral hazard of P2P platforms, according to the regulators.

- The Chinese Yuan accounted for 1.90% of global payments in July, rising from 1.72% in the prior month, according to SWIFT. The Yuan also rose to No. 5 in the ranking of world payment currencies. The proportion of global payments settled in the Chinese currency hit the highest level of 2.79% in August 2015 and surpassed the Japanese Yen to rank No.4 in October 2015. Amid elevated volatility in Yuan rates and slowdown in China’s economy, Yuan settlement started to drop from late 2015. In April 2016, the Yuan fell to No.6 in the ranking of world payment currencies.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.