Crit­i­cal time

China Daily (Hong Kong) - - FRONT PAGE - By AMY HE in New York and ZHENG YANGPENG in Bei­jing Xin­hua con­trib­uted to this story. Con­tact the writ­ers at amyhe@chi­nadai­ and zhengyang­peng@chi­

The US Fed­eral Re­serve Board’s an­nounce­ment that it will scale back its bond-buy­ing pro­gram, which is aimed at stim­u­lat­ing US eco­nomic growth, could crimp liq­uid­ity in China at a del­i­cate mo­ment, an­a­lysts warn.

The United States Fed­eral Re­serve Board’s an­nounce­ment that it will scale back its bond-buy­ing pro­gram could crimp liq­uid­ity in China at a del­i­cate mo­ment, an­a­lysts warned.

China’s in­ter­bank lend­ing rate is at its high­est since June, when the cen­tral bank pushed up rates to dis­cour­age bor­row­ing, a move en­gi­neered par­tially to pre­vent fur­ther shadow bank­ing ac­tiv­ity, said Pa­trick Cho­vanec, man­ag­ing di­rec­tor of Sil­ver­crest As­set Man­age­ment Group and for­mer eco­nom­ics pro­fes­sor at Ts­inghua Univer­sity.

“Part of the liq­uid­ity that’s been pro­vided has been US dol­lar bor­row­ing, both licit and il­licit,” Cho­vanec told China Daily on Wed­nes­day af­ter the Fed’s an­nounce­ment.

“Dol­lars flow­ing into China add to the credit sup­ply, and that has been based on the as­sump­tion that quan­ti­ta­tive eas­ing would con­tinue.”

The Fed’s pull­back from monthly bond pur­chases, which were aimed at stim­u­lat­ing US eco­nomic growth, could have im­pli­ca­tions for in­ter­est rates and cur­ren­cies around the world.

Cho­vanec said that al­though China has rel­a­tively lower ex­po­sure to macroe­co­nomic risks from the Fed’s ac­tion, the move could “un­der­cut liq­uid­ity at a del­i­cate mo­ment”.

The Fed acted af­ter months of spec­u­la­tion that it would be­gin slow­ing its con­tro­ver­sial stim­u­lus to the econ­omy, known as quan­ti­ta­tive eas­ing. Cit­ing progress in low­er­ing the US un­em­ploy­ment rate and in im­prov­ing eco­nomic con­di­tions, the agency said it will “mod­estly” scale back its pace of pur­chases by $10 bil­lion now.

It also said it will buy $75 bil­lion worth of Trea­sury and mort­gage­backed bonds each month, start­ing in Jan­uary. The move sig­naled the be­gin­ning of an end to five years of un­prece­dented US gov­ern­ment in­ter­ven­tion in fi­nan­cial mar­kets.

Tan Xiaosu, an in­ter­na­tional fi­nance pro­fes­sor at the Cen­tral Univer­sity of Fi­nance and Eco­nom­ics, said that al­though the mar­ket had al­ready fac­tored in some of the im­pact be­fore the Fed’s an­nounce­ment, there will still be a re­ac­tion when ta­per­ing ac­tu­ally oc­curs, in­clud­ing for­eign cap­i­tal out­flows and yuan de­pre­ci­a­tion.

The value of the yuan re­treated on Thurs­day, along with other emerg­ing mar­ket cur­ren­cies, but an­a­lysts said that the Chi­nese cur­rency’s de­cline will be lim­ited as its in­creas­ing in­ter­na­tional us­age means de­mand is still there.

Yukon Huang, a se­nior as­so­ci­ate at the Carnegie En­dow­ment for In­ter­na­tional Peace, said tighter liq­uid­ity might be a good thing, as it sends a warn­ing to small banks in China about the risks of ex­ces­sive re­liance on the in­ter­bank mar­ket.

Pos­i­tive as­pect

Much of the ten­sion in the in­ter­bank mar­ket can be at­trib­uted to small banks’ ex­ces­sive bor­row­ing from large banks, as the for­mer have a weak house­hold de­posit base.

“Liq­uid­ity in China ac­tu­ally is not the prob­lem. The prob­lem is lack of ef­fi­ciency in the money mar­kets,” he said.

Huang said now is also an op­por­tune time for China to re­duce its mone­tary ex­pan­sion, which dates back to the af­ter­math of the 2008 global fi­nan­cial cri­sis.

Bank of Amer­ica Mer­rill Lynch’s Ting Lu said in a note to clients on Sept 2: “China will surely be af­fected by the com­ing QE ta­per­ing, but we be­lieve the QE ta­per­ing will have lit­tle ma­te­rial im­pact on China’s growth, cur­rency val­u­a­tion and fi­nan­cial sta­bil­ity.’’

He added that “with the ris­ing un­cer­tainty over emerg­ing mar­kets due to the com­ing QE ta­per­ing, the Chi­nese gov­ern­ment most likely will put a spe­cial em­pha­sis on fi­nan­cial and eco­nomic sta­bil­ity’’.

In Hong Kong, Act­ing Chief Ex­ec­u­tive of the Hong Kong Mone­tary Au­thor­ity Ed­die Yue said Thurs­day that the Fed’s de­ci­sion to be­gin ta­per­ing mone­tary stim­u­lus start­ing next month will cause short-term vo­latil­ity in the mar­ket.

In a state­ment to the me­dia, Yue said that lo­cal banks had been ad­vised to mon­i­tor in­ter­est rates closely and not lend out too much.

Al­though the de­ci­sion to re­duce the stim­u­lus of QE re­flects a brighter view of the US econ­omy, which is ex­pected to have a pos­i­tive im­pact on the global econ­omy, Yue warned that mar­ket vo­latil­ity may oc­cur as the pace and scale of the Fed’s mea­sures are not clear.

Hong Kong Fi­nan­cial Sec­re­tary John Tsang said vo­latil­ity will con­tinue for some time. He ad­vised in­vestors and com­pa­nies to be care­ful about vo­latil­ity and take a long-term view in terms of in­vest­ment.

“We haven’t seen any out­flow of liq­uid­ity as yet, so we have to mon­i­tor the sit­u­a­tion closely,” Tsang said.


An em­ployee counts yuan bills at a bank in Xuchang, Henan prov­ince. The value of the yuan re­treated on Thurs­day, along with other emerg­ing mar­ket cur­ren­cies.

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