China Herald: PBOC

Showing posts with label PBOC. Show all posts

Tuesday, January 06, 2015

Expected: monetary easing - Sara Hsu

Just like in November 2014, China´s central bank, the PBOC, is expected to easy its monetary policies also in 2015 to push economic growth, writes financial analyst Sara Hsu in the Diplomat. More liquidity is needed in the market.

Sara Hsu:

Chinese banks can lend up to 75 percent of deposits under the current commercial banking law. This law is not necessary under the new Basel III standards, which have recommended that central banks now require a 100 percent liquidity coverage ratio (LCR). The LCR requires total coverage of cash outflows that can occur over the course of thirty calendar days by high quality liquid assets. China is in the process of implementing this new policy. As of now, the commercial banking law, put into place in 1995, creates the additional stipulation that banks can only lend up to 75 percent of deposits.

As of the end of November 2014, the loan to deposit ratio was 74 percent, close to the 75 percent ceiling. The current economic slowdown, caused by flagging manufacturing and a decline in the real estate sector has increased the need for policy stimulus. The need for easing policy is ironically better underscored by real rather than monetary indicators. The Shanghai Interbank Offer Rate (SHIBOR) climbed in mid-December, with one-month bond repos hitting a high of 5.277 percent, rising thereafter, due at least in part to the annual holiday cycle. The SHIBOR increase on December 17 was also attributed to changes in the Medium Term Lending Facility (MLF), as the central bank renewed some maturing MLF, cutting some to major banks in half. For these reasons, it is difficult to distill to what extent the current SHIBOR tightness reflects a real credit crunch.

Because of the monetary tightness witnessed in December and the continued slump in real economic indicators such as the purchasing managers’ index (PMI) and real estate home prices, analysts have been predicting that the People’s Bank of China (PBC) will implement another cut in the required reserve ratio (RRR). Additional liquidity will stimulate economic activity in an economy that has experienced low levels of manufacturing activity and a poorly performing real estate sector. A reduction in the RRR, a decline in benchmark interest rates, or direct injections of liquidity by the central bank can promote lending to a variety of sectors.

Monetary policy, in its usual form, has been referred to as a “blunt sword” since it normally does not target specific sectors (although the PBC has previously injected funds earmarked for specific sectors, crossing over into the realm of fiscal policy). Reform is necessary to revive growth by placing emphasis on new sources of productivity, as these areas of the economy will not naturally develop, given existing stringent regulation on their business and financial development. Service sector reforms must continue, since low-wage manufacturing continues to lose its comparative advantage. In the short run, tighter monetary conditions will likely prevail through the Spring Festival in February, as depositors withdraw funds for the holiday season, shrinking the deposit base from which loans are launched.

More in the Diplomat.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers´ request form.

Are you looking for more financial experts at the China Speakers Bureau? Do check this list.

Monday, November 24, 2014

China´s rate cut: weaknesses, but no panic - Shaun Rein

+Shaun Rein

The rate cut by China´s central bank PBOC took the markets by surprise on Friday. Business analyst Shaun Rein sees at CNBC some weaknesses in the countries economy, but no reason for panic. China is moving towards services and innovation, and that transition comes with some bumbs.

CNBC:

Sonia: What does China’s rate cut mean for the global economy?

A: The rate cut means that you are going to see other countries or other regions like the European Union might reduce some of the rate cuts so it might spur a lot of funds flowing into equity markets, so I expect that you are going to see some strength in Asian equities, in Hang Seng in Hong Kong over the next day or two. I think it is good for the equity market but I do not think the government is going to do too much because of concerns about credit problems that are very real in the country in China today.

Latha: Do you expect growth to pickup anytime soon in China? Is that the market’s belief at least?

A: The reality is no. I do not see the economy here growing to 8-10 percent a year like it has done the last three decade but that is a good thing. I think overall the government by allowing slowdown is actually doing the right thing and pushing towards economic reform. There are two parts to that – (1) you were starting at such a low base in the last three decades, growth has been high but the promise that too much of growth was based on export oriented and that’s not how they think. The government is trying to switch more towards more consumption and services. I had a new book that came out two weeks ago called 'The End of Copycat China', which looks at the shift and the government pushing up services and innovation.

Latha: Should this rate cut fire up metal stocks if the intention is to generate different kind of growth?

A: In the long-term it’s not going to be the major difference on growth. It’s going to increase stock because you got the hedge funds, there are investing based on sentiment rather than economic numbers.

More at CNBC.

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you looking for more financial experts at the China Speakers Bureau? Do check our latest list.

Monday, April 14, 2014

Making sense out of PBOC´s policies - Sara Hsu

+Sara Hsu

Financial analyst Sara Hsu tries to make sense out of the long list of policy changes the central bank, the People´s Bank of China (PBOC) has announced in the past year, under the Xi-Li government. "Right now, the opaque is becoming more transparent," she writes in The Diplomat.

Sara Hsu:

While the Xi-Li administration made it clear from the outset that they were pursuing financial marketization, it was unknown one year ago exactly how PBOC policy would seek to meet this general target. Now it is somewhat more transparent; the PBOC is carrying out major reforms every four months or thereabouts, with the first major move on July 22, 2013. The reforms truly are moving in the direction of financial liberalization, yet continue to control for risk.

Right now, the opaque is becoming more transparent; the general more specific, and one might assume that this will continue. To predict what major financial reforms may occur going forward, therefore, one must look back to the important meetings referenced in the statement above. The central government has already announced that the deposit rate ceiling will soon be lifted; according to this (very briefly established) pattern, this might take place in July, four months from now. We shall soon find out.

More in The Diplomat.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you a media representative and do you want to talk to one of our speakers? Do drop us a line.

Wednesday, March 05, 2014

The PBOC as a circuit breaker - Michael Justin Lee

Michael Justin Lee

China´s Yuan has been falling sharply against the US Dollar in the past week, and much debate emerged on what might be the politics behind this. It only means China´s central bank PBOC is doing its job as a circuit breaker by letter hot money out of the economy, writes financial analyst Michael Justin Lee in the ChinaUSFocus.

Michael Justin Lee:

Actually, the interpretation is not at all difficult if we imagine ourselves in the position of the Peoples Bank of China. What is the motivation of any central bank? Surely it is the maintenance of a stable and growing economy.

With that in mind, let’s consider in what economic situation China finds itself currently. Without question, China’s economy is slowing from recent high rates. This means that China requires a great deal less money sloshing around in its economy than it did just a year ago. Too much capital raises the risk of further inflation, which is already starting to spook many in China.

Therefore, some reduction in capital is necessary. The PBOC chose to target one particular kind of capital. They chose what is commonly called hot money.

Not all capital are equal. Some are better than others. The hot money form of capital has always been a bugaboo for emerging markets because what hot money giveth, hot money taketh away later.

This not a big problem when the economy is roaring ahead. But when the economy is slowing, a central banker’s legitimate fear is that all the hot money might be yanked away precisely when it might be needed most.

Therefore, from the central banker’s psychology, if the money is hot, it’s better to have it gone sooner rather than later. And that is what the PBOC engineered last week. The economic mechanism is less important than the psychological one.

One headline in the Wall Street Journal can be used for an example. It was: “Yuan’s Recent Decline Triggers Fears on Leveraged Bets.” This fear is exactly what the PBOC was trying to engineer. Consider if the PBOC didn’t break the market consensus’ thinking that the Yuan could only strengthen. Necessarily, this would incite more capital into China, some big portion of which is hot money, which is exactly what China doesn’t want in a now slowing economy.

There’s a financial phenomenon known as the self-fulfilling prophecy which states that if a large enough mass of people think a particular way about something and act upon that thinking, then their very acting upon it would cause that thing to happen for a time. For example, if we all expect the currency to rise, our buying of it will itself cause the currency to rise, even if our original expectation were wrong. And that is what the PBOC feared about the consensus thinking of a Yuan’s rise.

Their action last week was intended to be a circuit breaker. Just like in engineering, a circuit breaker exists to interrupt the flow of a current lest there be an overload eventually. The PBOC understands this applies in economics too.

More in the China USFocus.

Michael Justin Lee is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you a media representative and do you want to talk to one of our speakers? Do drop us a line.