PBOC Sheds Light on the Fiscal Factor as It Seeks Calmer Markets
PBOC is offering investors a running commentary on how it deals with the government.
(Bloomberg) -- China’s central bank is offering investors an unprecedented running commentary on how it deals with one of the most unpredictable actors in the market: the government.
The People’s Bank of China has included statements when publishing daily data on open-market operations since mid-June. One month on, it’s becoming apparent that a key reason for adding or removing liquidity from the market has been how much, or how little, cash is flowing through the economy from government coffers.
As the PBOC tries to keep liquidity "neither tight nor loose," clear statements are helping investors understand that the central bank isn’t trying to shift policy in either direction, for now. For money market traders, that’s reducing the risk of unsettling spikes.
"It signals more enhanced communication with markets about monetary policy, which could stabilize market expectations and reduce inter-bank rate volatility," according to George Wu, chief economist at Huarong Securities Co. in Beijing who was a PBOC monetary policy official for 12 years.
Policy makers are seeking "prudent and neutral" monetary policy this year as authorities try to squeeze out financial risk before a twice-a-decade Communist Party Congress this fall, when some top leaders will be replaced. Since the shock yuan devaluation almost two years ago roiled global markets and sent the currency to a five-year low, the PBOC has communicated more freely during times of heightened uncertainty.
Recent comments have mostly either referred to fiscal factors as reasons to raise or lower funding in the financial system, or pointed to periods when liquidity instruments will mature. The PBOC tends to skip cash and liquidity injections when the state is spending, and do more at times when funding dries up around tax collections and government bond auctions.
Major fiscal fluctuations come at the start or end of the quarter, and investors don’t know when or how much spending will flood in, said Lu Zhengwei, chief economist at Industrial Bank Co. in Shanghai. As government funds are held in an account at the central bank, that cash isn’t available as liquidity in the banking system until it is spent on goods and services.
"It’s so important to list explicitly the reasons for skipping an open-market operation," he said. "Otherwise, tension will spread even if the liquidity isn’t that tight."
The strategy has shown signs of paying off. Inter-bank anxiety as measured by the daily repurchase rate fixing level has fallen sharply since March.
While authorities have shifted monetary policy into neutral, fiscal policy has been taking on an expanded role to help keep economic growth humming.
There’s evidence that the authorities are jointly keeping an eye on liquidity in markets. The Finance Ministry asked for a slower pace of bond sales earlier this year, with the goal of improving coordination with monetary policy and avoiding a cash crunch.
And while only big banks are eligible to participate in the PBOC’s open-market operations, the funds that flow to smaller banks from government expenditure are therefore a more important source of liquidity for them, according to Ming Ming, head of fixed income research at Citic Securities Co. in Beijing and a former PBOC official.
Because most fiscal spending is directed toward public services, it’s usually paid directly to the companies or government agencies that in turn deposit the funds in a local bank account, starting the cycle of credit creation, he wrote in a recent report.
"Policy makers have paid attention to monetary and fiscal coordination for a long time," said Wang Yifeng, an analyst at China Minsheng Bank’s research institute in Beijing. "Fiscal conditions have their own cycle, and the PBOC should adapt."
--With assistance from Zheng Wu
To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at yzhao300@bloomberg.net, Xize Kang in Beijing at xkang7@bloomberg.net, Heng Xie in Beijing at hxie34@bloomberg.net.
To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Jeff Kearns
With assistance from Yinan Zhao, Xize Kang, Heng Xie