China Blinks, Confirmed
Last week, Chinese interpreted a meeting between financial regulators and the PBoC as positive for the markets. The statement from the meeting pledged greater cooperation between central bank and regulators. Analysts saw this as meaning the PBoC would inject liquidity to offset deleveraging efforts.
From Friday’s SCMP: China banking regulator softens tone amid financial crackdown
In an extraordinary briefing Friday afternoon, Xiao Yuanqi, director of the prudential regulation bureau under the China Banking Regulatory Commission, said that banks are now undertaking “self-examination” into whether their activities have amounted to “arbitrages” that the regulator vowed to crackdown. They will be given sufficient time to eliminate any practices found to be in violation of the rules eventually, he told them.
“We will open the front doors while shutting down the back doors. We’ll proactively encourage lawful bank businesses and leave the front door wide open,” said Xiao.
Responding to concerns that the CBRC is “competing with” other regulators to tighten restrictions as much as possible, Xiao said it is not true. He said the current “self-examination” aims to let banks and other financial institutions figure out the size of relevant businesses by themselves. The regulator will then check the authenticity of the numbers, and then eliminate any practices that breaches rules.
“We’ll leave a 4-6 month grace period before banks rectify their irregular practices eventually. We’ll also tolerate old investment schemes before [the seven directives] and let them mature and vanish,” Xiao said.
And now the latest from ZeroHedge: China Capitulates: Injects $25 Billion Into Liquidity-Starved Banks To “Appease Investors”
Predictably, China throwing in the towel on deleveraging immediately raised animal spirits: the Shanghai stock market rose 0.7% on Tuesday, having earlier fallen by nearly 1%. The yield on China’s benchmark 10-year government bond, meanwhile, fell back to 3.62% from 3.64%.
Ultimately, what the PBOC did is just what every other developed central bank when faced with declining markets: it capitulated.
“The timing of PBOC’s move does point to an intention to appease investors,” said Ding Shuang, an economist at Standard Chartered Bank.
As Goldman noted over the weekend, the first sign of Beijing’s desire to soften its tone emerged last Friday, when the PBOC said in its latest monetary-policy report that regulators should carefully handle the timing and pace of introducing their policies and solve financial risks in an orderly manner. The central bank also pledged to provide necessary liquidity to ensure “reasonable” credit growth. It waited just 2 days to do just that.
Also Friday, China’s banking regulator said in a briefing it was trying to “avoid creating new risks in the process of resolving existing risks” and that it would give banks time to adapt, applying tougher standards only on new investment products while allowing existing ones to expire intact.
Then on Sunday, an editorial from the official Xinhua News Agency urged financial regulators to refrain from turning the recent campaign of risk prevention into a fresh risk itself. The same day, Chinese Premier Li Keqiang stressed at a cabinet meeting the importance of “striking a balance” between maintaining financial stability, “gradual deleveraging” and stabilizing economic growth.
“There were indeed worries that if the market volatility induced by the regulatory crackdown worsened, it could lead to systemic risk and hurt the real economy further,” said Liu Dongliang, senior analyst at China Merchants Bank.
Assuming this does mark a shift in policy, bears can push back the timing of the apocalypse and once again raise their long-term USDCNY target.