China’s RRR Cut Risks A Bond-Leverage Crackdown
By Ye Xie, Bloomberg Markets reported and analyst
RRR Cut Risks a Bond-Leverage Crackdown
Beijing is moving toward putting a floor under the slumping economy. The PBOC cut the reserve requirement ratio for a second time this year, while Beijing signaled some policy fine-tuning in the housing sector. Neither move has changed the overall tone that China is doing the bare minimum to support the economy.
Meanwhile, investors are taking advantage of cheap funding to build up leverage in the bond market, sending the overnight repo volume soaring. The risk is that the PBOC may step in to crack down on the leverage.
Three days after Premier Li Keqiang flagged a cut in the RRR, the PBOC duly followed through. The central bank quickly came out to say that the RRR cut is a routine maneuver, in part to replace the maturing MLF loans that banks borrowed from the central bank. The PBOC said its stable monetary policy hasn’t changed, downplaying the notion this is the start of an easing cycle.
The RRR cut in July did little to arrest the growth slowdown. After all, the economy is faltering not because there’s a lack of loan supply, but because the real-estate deleveraging has dampened the demand for credit. Hence, China’s growth outlook relies on whether the housing market can stabilize and whether investments in other industries can pick up the slack.
There, Beijing also offered a glimpse of hope. The Politburo on Monday promised to provide more affordable housing next year. It indicated Beijing will take more of a supply-side approach, by increasing land and housing supply in the private sector, to address lofty housing prices, as opposed to cool housing demand, which is more economically damaging, Nomura’s economist Lu Ting noted. Still, Lu also pointed out that there has not been a 180-degree change in Beijing’s property curbs yet, suggesting the economic slowdown may continue in coming months.
It’s worth pointing out that the previous RRR cut in July hasn’t lowered overall corporate borrowing costs much, as China Bull Research pointed out. In fact, the weighted average lending rate for corporates rose by 10 bps to 5.3% in the third quarter. In other words, the RRR cut didn’t fully pass through to the economy.
Where did the money go? At least part of the liquidity has been channeled to the bond market, as investors borrowed short-term funds in the interbank market to buy government paper. The daily overnight repo turnover reached 4.7 trillion yuan ($737 billion) Monday, a level last seen in the early stage of the pandemic last year. (The 20-day average actually reached a record last month.)
Banks’ interbank lending to non-bank financial institutions rose to elevated levels last quarter, another sign of financial speculation, according to China Bull Research.
Beijing has been stressing that financial institutions should support the real economy, not speculate. In the past, the PBOC periodically drained liquidity to shake up leverage. The risk is that they do it again.
Mon, 12/06/2021 – 22:18