The People’s Bank of China bounced back from two successive months of balance sheet contraction in April, as the US Federal Reserve moots a shrinking of its own assets.
The “Monetary Authority Balance Sheet” just released by PBOC indicates that asset growth in April was primarily fuelled by “credit to other depository companies,” which consists primarily of “re-lending” implemented via open market instruments including repurchase agreements, medium-term lending facilities, provisional secured loans and temporary lending facilities.
PBOC’s total assets were 34.13 trillion yuan in April, for a gain of 394.317 billion yuan compared to the preceding month.
“Credit to other depository companies” accounted for the preponderance of this increase, rising by 384.972 billion yuan.
PSL rose by 83.9 billion yuan in April to 2,299.7 billion yuan, MLF increased by 44 billion yuan to 4,108.3 billion yuan, and SLF fell by 59.724 billion yuan to 10.272 billion yuan.
These figures indicate a shift in the open market instruments employed by PBOC toward the increased use of MLF, with significant implications for credit expansion by banks.
“Changes in the methods for expanding base money will bring two major shifts,” said Yan Ling, macroeconomics analyst for China Merchant Securities to 21st Century Herald.
“The first is that liquidity adjustments are more active, and the second is changes to the borrowing costs of commercial banks…if banks want to expand their balance sheets they will have to introduce high-cost funds, thus raising the capital costs of commercial banks.”
Foreign exchange reserves diminished for the 18th successive month in April, although the pace of decline has eased. Banking observers that this ongoing shrinking in foreign reserves has compelled PBOC to place greater emphasis upon re-lending as means of expanding base money.
According to Yan foreign reserve levels and liquidity are now the chief factors driving changes to PBOC’s balance sheet, with decisions by the US Federal Reserve expected to have a strong impact.
The growth in central bank assets follows two consecutive months of contraction, which PBOC said was the result of seasonal fluctuations in cash release in February and expanding fiscal expenditures in March.
While the market has expressed concerns about liquidity due to the ongoing efforts of regulators to deleverage the Chinese economy, PBOC has said that balance sheet contraction does not necessarily mean tightening of the money supply.
Shao Yu, chief economist for Orient Securities, notes that given money supply consists of base money provided by the central bank and broad money provided by lenders, PBOC’s shrinking of assets and any clamp down on the activities of banks should be staggered, in order to avoid a liquidity crunch.