At the meeting about self-discipline mechanism of interest rate pricing held on May 25, the People’s Bank of China (PBOC), or China’s central bank, said it has noticed market’s worry about capital supply at the year end. Therefore, in view of many factors which will influence liquidity in June, it plans to conduct medium-term lending facility (MLF) in early June and conduct 28-day reverse repo at proper time so as to match capital supply, keep liquidity basically stable and stabilize market expectation, reported by Financial Times.
The recently inverse trend between the benchmark overnight Shanghai Interbank Offered Rate (Shibor) and Loan Prime Rate has drawn market attention. The 1-year Shibor was higher than 1-year LPR on May 22 for the first time and was close to the central bank’s 1-year benchmark interest rate for loan. Although industry insiders said there’s no comparability between Shibor and LPR and they cannot be regarded as average liability cost of banks and overall lending rate of banks respectively, it is the truth that the market is still worried about current liquidity.
Industry insiders indicated that China Banking Regulatory Commission (CBRC) has frequently released many documents about regulating business since April to urge banks to lower leverage ratio, downsize off-balance-sheet business, business of investing in non-standardized assets and interbank business. With regulation strengthened, capital supply continues to be under pressure in the second quarter, particularly in June when financial institutions have to deal with macro-prudential assessment. In terms of international factor, there’s expectation on interest rate hike by the US Federal Reserve in June. Under this circumstance, the PBOC said it would conduct MLF and 28-day reserve repo so as to provide capital supply across the quarters, actually aiming to ease and stabilize the market.
Previously, the PBOC mentioned in a report of implementation of monetary policy in the first quarter that “in the next stage, the PBOC should adapt to change in model of supplying currency and financial innovation development, keep an eye on potential impact of change in domestic and foreign situation on liquidity, more exactly monitory and know actual financing situation of the whole society and flexibly use various monetary policy tools to maintain liquidity basically stable.” It also indicated that “it will provide necessary support of liquidity to reasonable growth in credit and prevent fast expansion of credit and further growth of leverage ratio. It will enhance financial regulation coordination, meet the timing of introduction of supervision policy, stabilize market expectation, seize balance between deleveraging and keeping liquidity basically stable, and offer steady liquidity environment for stabilizing growth, adjusting structure, deleveraging, curbing bubble and preventing risks.”
Industry insiders indicated that the central bank won’t change the keynote for neutral monetary policy, but it will control pace and strength of deleveraging to protect market liquidity.
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