China’s central bank said reasonable volatility in money-market interest rates must be tolerated as it manages liquidity in the country’s financial system to rein in credit growth and speculative lending.
“When the valve of liquidity starts to tame and curb excessive credit expansion, money-market rates, or the cost of liquidity, will reflect that,” the People’s Bank of China said in its fourth-quarter monetary policy report released yesterday.
China’s benchmark repurchase rate surged to a record in June after the central bank refrained from addressing a cash crunch in the interbank market as it cracked down on shadow finance.
The central bank said that while it will use tools, including the reserve-requirement ratio and short-term lending facilities to ensure “appropriate liquidity,” it will not bankroll a growth model that relies on investment and debt.
“The massive borrowing and construction led by local governments in recent years” increased risks in the Chinese economy, the central bank said in the report. Such a growth model can “easily lead to rising debt and may squeeze credit for other players, especially small businesses,” it said.
The central bank’s control over monetary conditions “means market rates are more sensitive to changes in the economic situation and the demand and supply of money,” it said. “So we must tolerate reasonable interest-rate volatility.”
China’s seven-day repurchase rate, a gauge of interbank funding availability, jumped to 10.77 percent on June 20 as institutions struggled to obtain funds before the central bank stepped in to add liquidity. The rate climbed again in late December last year to 8.84 percent as banks hoarded cash to meet year-end regulatory requirements.
The volatility prompted analysts to call on the monetary authority to provide more clarity regarding its policy intentions.
Becky Liu, a senior rate strategist at Standard Chartered PLC in Hong Kong, said in November last year that the bank had sent out mixed signals, while Lu Ting (陸挺), head of Greater China economics at Bank of America Corp in Hong Kong, said in a Dec. 20 note that the central bank had an “insensitivity to market reactions” that made it “prone to make operational mistakes.”
The central bank will improve its communications to stabilize market expectations and keep money-market rates relatively stable, according to yesterday’s report.
To prevent systemic financial risks, the central bank will enhance the monitoring of credit default risks in local-government financing vehicles, industries facing overcapacity, and the property sector, according to the report. At the same time, the PBOC will continue to improve the supervision of wealth-management products and the interbank business, it said.
Policy makers are stepping up efforts to rein in financial risks and squeeze speculative lending as concerns increase that the surge in borrowing over the past five years will tip the country into a crisis.
Last month’s 11-hour rescue of investors in a 3 billion yuan (US$495 million) high-yield trust product distributed by Industrial & Commercial Bank of China Ltd underscores the pressure on authorities to maintain financial and social stability even as they seek to deter excessive risk taking.
The combined debt of households, corporates, financial institutions and the government rose to 226 percent of GDP last year, up from 160 percent in 2007, according to Credit Agricole CIB calculations.