The Asia Global Payment Summit. Bali, Indonesia. 10-11 October 2019

Stock and Bond Markets Reel Amidst Expectations of Monetary Tightening

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Analysts say the faltering performance of Chinese stocks and bonds at the start of the week reflects heightened expectations of further monetary tightness in the wake of the 19th National CCP Congress.

On 30 October the Shanghai Stock Exchange Index fell more than 1% to beneath the 3400 point threshold, while Shenzhen’s SME board dropped over 2%.

On the same day China’s 10-year sovereign bonds saw their yields rise 10 basis points to over 3.9%, for their biggest one day increase since 15 December, while 5-year sovereign bond yields hit a three year high of 3.92%.

While the People’s Bank of China unveiled a new open market operations tool on the same day – the 63-day reverse repo, to help stabilise markets with a net injection of 40 billion yuan, observers continue to anticipate tighter monetary policy in the wake of the 19th National Congress of the Chinese Communist Party.

A research paper recently released by HSBC points out that since the end of 2016 PBOC has continually constricted liquidity on the interbank market, with the 7-day interbank repo rate rising to 2.9% in September from 2.5% in January, signalling the tightest monetary conditions since October 2015.

HSBC analysts anticipate the introduction of further regulatory measures to constrain the financial sector, and the Chinese central bank continuing to maintain clenched monetary policy as part of efforts to stymie breakneck credit growth.

According to the report, monetary policy will continue to tighten despite the moderation in industrial production and investment growth in the third quarter, and the central bank will continue to actively maintain a neutral stance in the fourth quarter.

Other observers concur with HSBC, with Liu Yuhui (刘煜辉), economics professor with the Chinese Academy of Social Sciences and chief economists at Tianfeng Securities, concluding that 19th National CCP Congress report flags hawkish monetary policy and credit contraction.

Frances Cheung, Head of Rates Strategy for Asia ex-Japan, Societe Generale, said to Yicai.com that “in order to achieve the ‘comprehensive establishment of a socialist modernised country’ as mooted by the 19th National CCP Congress report, China must further raise productive capacity and efficiency, and thus increase household revenues and wealth, not debt.”

“The direction of deleveraging should be focused, and not only preoccupied large-scale reduction in loans in the real economy as a percentage of GDP.

“Interbank lending, wealth management product and off balance sheet operation indices all clearly show that Chinese deleveraging has achieved some progress, but still requires further improvement.”

 

 

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