PBoC policy tightening in baby steps – TDS

The PBoC has decided to follow the Fed as it did in March (though not in June) with an increase of 5bps to 2.50% in the reverse repo rate, tightening via just one of the interest rates under its purview, notes Sacha Tihanyi, Senior Emerging Markets Strategist at TDS.

Key Quotes

“The choice of repo rate (versus the official lending rate) continues to show the focus of monetary policy is fine-tuning funding costs for the banking sector (part of the ongoing “derisking” efforts) rather than something more aggressive or economy-wide such as a broad RRR or lending rate hike.”

“Given that the size of the hike was only nominal, and the fact that actual interbank repo rates remain substantially above the cost of PBoC-sourced liquidity, it serves more as a signaling mechanism rather than a substantial policy move.”

“The direction of the policy move remains consistent with the current momentum in monetary policy from the PBoC, and is in line with messaging from the highest levels of government at this year’s National Party Congress (likely to be reiterated by next week’s annual economic work conference).”

“The small magnitude also shows caution in moving too aggressively, possibly due to the proximity of the economic work conference, but also perhaps due to a concern over roiling rates markets, and putting further upside pressure on financing conditions as well as longer term bond yields.”

“The timing in following the Fed and the “signaling” implied by the rate hike suggests a focus on CNY support, as policy makers have kept the renminbi on a basket basis trading in the upper end of its past 1.5 year range, following the appreciatory surge that began in mid-2017. This also underpins our bullish RV view on the renminbi.”

“While market rates (and regulations) remain tighter, credit is not entirely being restricted. Indeed, the impulse from total social financing (primarily driven by the new RMB loan component) continues to show relatively supportive dynamics into year end.”

“However, our quantification of overall monetary conditions in China suggests that the easing that had been the case since Q3’15 had tapered sharply beginning in Q4’16 (as Chinese growth began to rapidly reaccelerate), and now has been tightening on a year-on-year basis since Q3, albeit cautiously. This is consistent with our overall view on the policy stance of selective real economic support but general monetary tightening, in line with the policy goals of China’s leadership.”