Analysts see monetary policy loosening further in the final quarter of 2017, given gains in the Chinese yuan against the dollar as well as expectations of a slowdown in economic growth and further policy initiatives from regulators.
Mid-September has seen the cost of funds on the interbank market post ongoing gains, with Shibor rates continuing to rise across the board, and the weighted average for 7-day interbank pledge-style repos rising from 3.3% at the start of the month to around 3.9%.
September is the final month of the third quarter, and demand for funds has risen during this period due to standard tax payments as well as the conclusion of macro-prudential assessments by regulators of Chinese financial institutions.
“Currently when banks reach a sensitive time they are especially cautious,” said one analyst to 21st Century Business Herald, in reference to the mid-September period.
“They make very little money available and retain a large volume of excess reserves, and this is why capital has been tight of late in general.”
In response to these conditions the Chinese central bank has stepped up monetary expansion considerably, with gross injections of 1.188 trillion yuan for the month of September by the end of business on the 20th.
Last week net injections were 260 billion yuan, for the largest net injection in a single week since 15 July of this year.
Zhao Bo’wen, senior researcher with Chinese asset management company Blue Stone, said that the central bank’s basic position that monetary policy should be stable and neutral hasn’t undergone significant change, and it is averse to seeing funds become too tight or too loose.
“Overall, the exchange rate as a factor restraining monetary loosening by the central bank has temporarily disappeared,” said Zhao. “In the fourth quarter, following expectations of the ongoing release of a series of unified regulatory policies as well as a potential slowdown in economic growth, monetary policy could become even looser than it is at present.”
Zhao points out that following the appreciation of the renminbi the stabilisation of the exchange rate is no longer an urgent priority for the central bank.
In addition to this further regulations and policies are expected from the central government before the end of the year as part of its ongoing deleveraging campaign and financial sector, given the successes achieved in the first half.
Zhao said that prior to the launch of the current round of coordinated policies, the government had pursued its deleveraging goals primarily by having the central bank control the cost of funds. The method lacked effectiveness and led to frequent fluctuations in capital costs.
The coordinated policies launched by multiple agencies since the start of 2017 have proven more effective than previous approaches however, serving, for example, to curb investment by money funds in the interbank market.