Led by the US Federal Reserve, a number of central banks are considering a reduction in the size of their balance sheets.
The US Federal Reserve has decided to slash its balance sheet after the Federal Open Market Committee meeting in March. The only uncertainty is when and what size.
The People’s Bank of China (PBoC) cut its total assets by 1.1 trillion yuan in the first quarter, official data shows.
Does that mean the mainland central bank is going to shrink its balance sheet in tandem with the US?
This is quite unlikely at the moment given complications like the trend of renminbi and interest rate differentials.
But even if the PBoC is unlikely to follow the Fed, China itself does have an urgent need to deleverage, and that will lead to tighter liquidity anyway.
Market liquidity turned tight in April. The situation shows no sign of easing in May.
As the broad economy is stable, there is no reason for the PBoC to loosen the monetary policy in the near future.
Following the aggressive expansion of Chinese banks in previous years, regulators have no choice but to strongly enforce the deleveraging campaign to steer the country clear of a burst in asset bubbles in both the property and financial markets.
The China Banking Regulatory Commission has ordered all banks to complete self-inspections and submit reports by July 15. Banks are hence likely to be more conservative when it comes to lending.
As such, tight market liquidity may continue to weigh on financial markets in the second quarter.
Borrowing costs could creep up as liquidity tightens, hitting corporate profitability.
Money supply is set to stay tight in the next three to six months. Investors should closely watch regulators’ actions, including the implementation of existing rules and unveiling of additional measures.
This article appeared in the Hong Kong Economic Journal on May 8
Translation by Julie Zhu
[Chinese version 中文版]
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