Will the PBOC Say One Thing and Do Another?

by on January 8, 2014 2:21 pm BST

The People’s Bank of China (PBOC) has its hands full in dealing with multiple cash crunches in 2013 that forced short-term rates to spike up. In less than a month from the previous market squeeze, the PBOC may face another cash crunch as it tries to weed out the very large shadow banking industry in China.

“It’s difficult for the central bank to implement monetary policy,” said Liang Youcai, senior economist at the State Information Centre. In June and December, the market forced the PBOC’s hand into injected new capital in the markets as seven-day repurchase rates jumped. The issue the Chinese central bank has to deal with the country’s need for easy money while being able to stabilize and expand economic growth.

The crunch is likely due to the banks rushing to meet regulatory requirements by the end of each quarter, which happened both times in 2013. Analysts believe that the next demand for cash will happen at the end of January which signals the Lunar New Year holiday.

The PBOC will target short-term interest rates, including the Shanghai interbank offered rate (SHIBOR), to dictate liquidity and credit. The aim is to reduced the dependence adjusting ad-hoc controls. “The traditional controls on credit are becoming less effective, while the interest rate transmission mechanism has yet to be established, This is a challenge for the PBOC,” said Xu Gao, chief economist at Everbright Securities.

The Chinese government is looking to implement long-awaited economic reforms, but it is still unlikely that these will be put in place anytime soon as China is striving to reach further growth expansion. They are risking a credit crisis by not taking action. “Reforms are clear but will not be very quick. The whole reform process may not be completed in three years,” said You Hongye, an economist at Essence Securities.