Chinese policymakers moved to improve fragile market sentiment Wednesday with a step up in its recent support for the yuan and an injection of cash to the financial system.
(Bloomberg) — Chinese policymakers moved to improve fragile market sentiment Wednesday with a step up in its recent support for the yuan and an injection of cash to the financial system.
The People’s Bank of China injected the largest amount of short-term cash since February one day after it slashed interest rates on a slew of monetary tools. Minutes before the liquidity addition, the central bank also offered the most forceful guidance to yuan traders since October via its daily reference rate for the managed currency.
Officials have also taken measures to address the sliding stock market. Chinese authorities asked some investment funds this week to avoid being net sellers of equities, according to people familiar with the matter.
Confidence in China’s financial markets is worsening by the day, as a slew of economic data from retail sales to fixed-asset investment point to a sluggish recovery. The onshore yuan is falling toward its weakest in 16 years against the dollar and the MSCI China Index of stocks is poised to erase gains seen since a key policy meeting in late July that had stoked hopes for more stimulus.
Meanwhile, one of China’s largest property developers is at risk of default and a financial conglomerate with 1 trillion yuan ($138 billion) under management missed payments on investment products, stoking fears about possible contagion.
However, the unexpected interest-rate cuts by the PBOC have failed to restore optimism and market moves suggest traders are looking for more aggressive supportive measures. What the country needs is more fiscal stimulus and further monetary loosening such as a cut to banks’ reserve requirements, according to analysts.
China Rate Cut Reaction the Latest Sign Beijing Has More to Do
On Wednesday, Beijing injected 297 billion yuan of cash via seven-day reverse repurchase contracts and it set a fixing that was 783 pips stronger than the average estimate in a Bloomberg survey with traders and analysts. The onshore yuan was little changed while a gauge of stocks listed in China dropped for a fourth straight day.
“It is hard to boost the economy easily or the cost is very high,” Becky Liu, head of China macro strategy at Standard Chartered Bank said, citing a slew of issues including weak demand and the fragile property sector. “Aside from helicopter money, nothing seems to be very effective so more aggressive actions will be needed to avert this downward momentum.”
Conflicting Ambitions
The PBOC is tasked with keeping the currency stable while guiding borrowing costs lower to boost the economy — two ambitions that can often be in conflict. A weak yuan may damp the appeal of China assets to overseas investors, while Chinese firms may be reluctant to convert foreign currencies into yuan given the yawning yield differential between China and markets like the US.
Overseas bond investors look to be heading for the exit. Global funds cut their holdings of Chinese government bonds by the most since February last month, according to official data.
And bearish sentiment toward the yuan has intensified in the options market, with one-month dollar-yuan implied volatility offshore hovering around the highest since April. The onshore yuan also traded within 0.5% of the weak end of its 2% trading limit defined by the daily reference rate on Tuesday.
These are further signs that if additional policy action to support the yuan aren’t delivered quickly, bearish wagers may grow.
PBOC Tools
The yuan pared the worst of Wednesday’s losses after some Chinese state-owned banks were seen selling dollars in both onshore and offshore markets, according to three traders, who asked not to be identified as they weren’t authorized to speak publicly. The size of the selloff was not significant onshore, one of them said.
Other tools in the PBOC’s arsenal include injecting dollar liquidity or adding punitive costs to those shorting yuan in forward markets.
“A combination of monetary policy and fiscal support is needed to boost sentiment on a sustained basis and kick-start the recovery cycle,” said Frances Cheung, a rates strategist at Oversea-Chinese Banking Corp. in Singapore. “Demand for credit, instead of availability, is a more pressing issue.”
–With assistance from Qizi Sun, Tania Chen, Chester Yung and Jing Zhao.
(Updates with latest rescue measure from the government.)
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