Adios Easy Money, China Slowdown Coming
Earlier today in Chinese Real Estate Sector Has Turned, Economy to Follow, I looked at the cyclical turn in real estate. The main factor driving real estate growth was credit growth and in July, residential mortgages were more than 100 percent of bank lending. Credit growth has slowed over the past few months though, and the PBoC Pre-Announced M2 Growth for August and September in order to calm the market. As I explained in that post, very slow monthly growth figures roll off over the next three-months, such that the PBoC could effectively slow money supply growth while reporting a rise in the 12-month growth rate. I wrote:
In order to achieve 12% growth by September, M2 would have to grow at 1 percent mom for the next two months. Whether a boost in growth is coming, or the PBoC plans to baffle the market with BS remains to be seen. Year-on-year comparisons will raise the growth figure, but a growing flow is needed to maintain GDP, not simply a more favorable year-on-year comparison.
Now it seems the PBoC is indeed jawboning, but the market isn’t buying it.
China’s central bank queried domestic financial institutions for their demand for 14-day reverse bond repurchase agreements on Tuesday, traders told Reuters, the first query for such a tenor since February.
The market reaction was swift, interpreting the survey as indicative of tight money, of no interest rate or RRR cuts on the horizon.
Reuters: UPDATE 2-China treasury futures tumble as cbank eyes adding short-term liquidity
China bond futures posted their sharpest fall in three months on Tuesday as the prospect of more liquidity injections by the central bank into the financial system reduced expectations of more aggressive policy easing.
Traders said the People’s Bank of China (PBOC) asked banks about demand for 14-day reverse bond repurchase agreements for the first time since February, suggesting it may be expanding its strategy of using targeted, short-term injections rather than cutting interest rates or banks’ reserve requirements (RRR).
As a result, and confirming once again that fundamentals are dead even in China where only liquidity injections matter just like across the entire “developed” market, the price of Chinese 10- Y treasury futures tumlbed 0.38%. This was also China’s first glimpse of what a VaR shock in government bonds will look like once yields spike from recent record lows.
A senior trader at a major Chinese state-owned bank in Shanghai, cited by Reuters, said that “the market interprets the move as another sign that the central bank won’t cut interest rates and RRR for now as it injects more short-term money into the banking system.” He added that the PBOC announcement “is likely to set a floor for the fall of the yields of government bond futures, and thus investors sold the futures on the news.”
Slowing investment, falling home prices and then slowing GDP growth to follow.