22 January 2020

The Big Picture: MONEY FLOW

The People’s Bank of China has refrained from making any moves in three open market operation sessions from last Thursday, effectively draining liquidity worth 105 billion yuan from the banking system. The tightening of cash flow has renewed fresh speculation that the central bank may switch to a more prudent liquidity management after weeks of cash injection via the open market operation, sparking concerns about a possible reemergence of the credit squeeze which shook up banks in June. We believe the suspension of regular open market operations is only a gesture and a subtle warning from the policy makers amid rising capital inflows and the risk of credit over-expansion. It is not necessarily a change of policy stance. It is likely that the central bank will be more inclined to provide liquidity in a target-oriented basis when a specific lender is in need of funds, instead of pumping cash to the overall system. Money rates are expected to remain high, especially the short-term rates, as banks approach the month-end deadline to meet their capital requirements.

Good sign: Chinese steelmakers will cheer a firmer recovery momentum of the nation’s economy, after having suffered from falling product prices and oversupply in the past months. Angang Steel Co. and other steelmakers are likely to emerge as more defensive bets on the stock market as their profitability is likely to improve in 2014. In the international commodities markets, base metal copper gained in London after a private manufacturing activities index conducted by HSBC showed Chinese factory activity hit a seven-month high of 50.9 in October, sending a clear message that the world’s second biggest economy may have bottomed out. Increased new orders and new export orders showed demand has improved both at home and overseas.

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