People’s Bank of China action sends shivers down financial markets

Business | 26 Jan 2021 2:55 pm

A chill swept through China's financial markets after the central bank withdrew cash from the banking system and an official warned about asset bubbles, Bloomberg reports.

The People’s Bank of China drained about US$12 billion via open-market operations on Tuesday. The decision was unusual in the weeks before the Lunar New Year holiday, which in 2021 falls in mid-February, because residents typically need more cash to pay for seasonal travel and gifts. It also went against recent reports in Chinese newspapers that liquidity wouldn’t be tightened before the holidays.

While Tuesday’s withdrawal was small in isolation, it added to signs that Beijing is growing wary of how cheap and plentiful liquidity has stoked excess in markets. PBOC adviser Ma Jun told local media that risks of asset bubbles – such as in the stock or property market – will remain if China doesn’t shift its focus toward job growth and inflation management instead.

The reaction was particularly brutal in Hong Kong’s stock market, where onshore funds were helping underpin a world-beating rally. Mainland investors bought a net HK$250 billion (US$32 billion) worth of Hong Kong stocks this year through Monday, almost 40 percent of last year’s total, and were buyers again on Tuesday. The Hang Seng Index slid by 2.7 percent from its highest level since June 2018, led by a 6.7 percent plunge in Tencent Holdings.

In mainland markets, a gauge of interbank borrowing costs jumped 32 basis points to 2.74 percent on Tuesday, the highest level in a year. Futures on Chinese government bonds due in a decade were poised for the biggest decline since September, while the CSI 300 Index of shares in Shanghai and Shenzhen, which has been approaching 2007’s record high, fell by 2.1 percent.

“The PBOC wants to bring investors out of the euphoria caused by abundant liquidity in December,” says Xing Zhaopeng, an economist at Australia & New Zealand Banking Group. “The PBOC is unlikely to loosen its purse strings at least this week, which will make cross-month liquidity very tight.”


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