China’s central bank is sticking to its avowed objective of maintaining a “balanced and neutral monetary policy”, as well as seeking greater coordination with other regulators to forestall systemic financial risk.
Concerns continue to abound in the market that ongoing efforts by Chinese regulators to deleverage the economy will lead to scarce liquidity in the second quarter.
The Bank of Communications Interbank Liquidity Index (IBLI) has peaked at 21.66 since the start of Q2, well below the peak of 129.45 breached in Q1.
However, the Q2 volatility index of 34.7 is far lower than the reading of 52.7 in the first quarter, indicating that while liquidity may be tightening, regulators are keeping monetary supply on an even keel.
After refraining from open market operations for three consecutive trading days, PBOC undertook 111 billion yuan of reverse repurchases on 10 May, as well as released nearly 50 billion yuan in pledged supplementary lending (PSL) to offset the maturation of 200 repo agreements.
Chen Ji, senior researcher with the Bank of Communications Financial Research Centre, said to FT China that the figures indicate market liquidity fluctuations have improved considerably since the first quarter, and that monetary authorities are applying a range of tools to achieve more stable change and development.
According to Chen the recent, intense pressure on market liquidity is already easing. This is not due to any relent in deleveraging efforts by regulators, but likely because the market reaction outpaced the introduction of concrete policy measures by authorities.
While IBLI has seen overall gains over the past three months, it still totters around the “normal” or “strong” strata when it comes to liquidity pressure.
Chen expects market liquidity to remain steady in the near future, with only modest gains in market rates as regulators continue to pursue deleveraging measures. He sees little change of interbank weighted rates breaching the 3.7% threshold.
“Future regulatory policy changes and liquidity adjustments by monetary authorities will be mutually complementary,” said Chen. “This is due to consideration the potential shocks of new policies on the market and the need to prevent liquidity risk triggering systemic risk, as well as the need to continually advance financial regulation, and create an even more stable financial system that supports the real economy.”