The People's Bank steps back, a little, from the brink

But fears of slowing growth send China into a bear market.

By Jim J. Jubak Jun 24, 2013 6:04PM

The People’s Bank of China has taken a step back from the brink. But it’s a small step, and global investors are clearly still worried that actions by China’s central bank will further slow China’s economy. The Shanghai Stock Exchange closed down 5.9% Monday and Hong Kong’s Hang Seng Index dropped 2.22%. In Tokyo the Nikkei 225 Index ($JP:N225) fell 1.26%.

Last week, China’s central bank let short-term interest rates climb and then climb some more. On Thursday short-term money market rates climbed as high as 28%. The seven-day repo rate, a benchmark for the interbank market in which banks lend to each other for the very short-term, reached a record high of 12% on June 19, the highest level since 2006, according to Bloomberg and then shot up to 25%, intraday, on June 20.

That was enough to bring the People’s Bank into the market. The seven-day repro rate fell to 7.32% Monday after dropping 2.27 percentage points on Friday. The overnight repurchase rate fell 4.42 percentage points to 8.43% on Friday and has dropped to 6.47% on Monday.

Image: (Shanghai, China © Yang Liu/Corbis)But the central bank hasn’t injected enough liquidity into the markets to end the current cash squeeze at many banks or to take rates down to normal levels. At 6.47% the overnight rate is still more than double the average for 2013 of 3.09%.

And that’s what has financial markets worried.

It looks like the People’s Bank has decided to do just enough to avert a crisis in the banking sector -- there were rumors in China Friday and over the weekend of bank failures sparked by regular maintenance at one of the country’s big banks that took ATM machines off line for an hour.

But it also looks like the central bank remains determined to use the current liquidity squeeze to crack down on the shadow-banking sector. Total credit in China grew by a frightening 52% in the first five months of 2013 from the same period in 2012. Much of that -- an estimated two-thirds of credit growth -- is coming from the shadow banking system of loans from off-balance sheet bank vehicles, financial entities "associated" with local governments, trusts, and other wealth management vehicles.

That rate of lending is a problem, because when lending grows at that pace the odds are that an increased percentage of loans will go bad. The central bank has minimal control over shadow lending, since the lenders in this parallel system aren’t regulated by the central bank. One solution, these moves suggest the central bank has decided, is to shrink liquidity in general so that shadow lenders will have less access to cash.

Of course, less liquidity means less economic growth. Economists are starting to suggest that growth in China could slow to as little as 6% in coming quarters, well below the 7.5% official growth rate.

China isn’t facing a financial crisis since ending the liquidity crunch is pretty much within the central bank’s power. But 6% growth when the world is counting on 7% or 7.5% -- and hoping for a higher growth rate -- is a big deal for global economies and global stock markets.

Do remember, however, that any change in policy at the People’s Bank will produce a huge snap back rally from what is now a bear market in China’s stock markets.

When? On Monday the People’s Bank said liquidity in China’s financial system was "reasonable." I think that’s a sign that the current policy is likely to stay in effect for this week, anyway.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of any stock mentioned in this post as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio.

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Jun 24, 2013 9:27PM
You should quickly bury this article and write a new one telling us your perspective on today's Ben Bernanke Premature Ejacu-bank-elation. With the Dow down nearly 250 points and heading South, Bernanke printed more fake dollars so his member banks could salvage the losses. Too bad they didn't bother to notice the amount of SELL ORDERS stacked up in Fund Manager offices that engaged by the end of the day. The Dow closed DOWN another 139 points, making that new indenture debt do no good whatsoever. If you put the move in perspective... Bernanke committed a grossly irresponsible act that cost us plenty, and still has his day job. Four more days of the week to go. I see the Dow dropping another 1,000 or more points and picking up momentum. The ONLY way you and I can stop this stupid madness is to SELL and force the felonious stock market to only have Bernanke funding it. The debt would get so incredible that no one will mind vanquishing it and killing the bond holders. I see a WAR ahead. No war is a good war, the worst are over fake money.
Jun 24, 2013 11:14PM
if China's growth is going to moderate to 6% then the optimism for the US economy is way over inflated and the Fed will not be able to taper QE3 until Jam 2014 and that will crush bond yields going into year end.  We may have a really good rally in equities and gold this fall as WS misses the message again.
Jun 25, 2013 10:26AM

I do believe that the titanic has been sinking all along. Getting a kick out of that excess inventory and calls to pick up the crap you ordered.


Why what a simple rule of thumb that stock does no good in the back room but is only good on the shelves being sold. But all that ordering certainly gave the PONZI Casino a boost. Why it even helped the string puppets and their calls to look at all the jobs being produced here in the US!


Looks like carnage at it's finest. Why another round of qe anybody????


why the string puppets are still basking in their imaginary Fantasy Island so called green. Should really make the color poop brown as flushing is all it is good for in the days ahead.


Good thing for that injection to prop the phony treasury market as it helps to heard the lost sheep.

Jun 25, 2013 8:00AM
Jimmy, once you jump off a cliff, you can't just step back. The China Freight Train to economic near term hell has already left the station, there is literally nothing the People's Bank can do to stop a massive collapse.
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