The People’s Bank of China has been tightening liquidity since the first quarter.
In response to a slowdown of economic growth, the central bank seems to be more willing to provide short-term funds through reverse repurchase agreements recently. But that should not taken as a sign that the tightening bias is no longer there.
China’s broad money supply or M2 expanded 11.3 percent over the year ending December 2016, down 2 percentage points from a 13.3 percent growth at the end of 2015. The growth rate has further moderated to 10.5 percent in April.
While the overnight and one-week Shanghai Interbank Offered Rate (SHIBOR) has declined from its May peak, longer tenor rates continue to go up.
For example, the one-year SHIBOR hit 4.37 percent on Thursday, staying above the official one-year lending rate for three consecutive sessions.
When funds were abundant, banks were willing to offer loans at discount interest rates. It was not uncommon for mortgage loan borrowers to get 10-30 percent lower mortgage rates, for example.
But things are very different now. Small and medium-sized firms are particularly hard pressed when they are short of funds.
The average lending rate has risen to 5.53 percent in the first quarter from 5.27 percent in the fourth quarter of last year, according to data released by the PBoC.
It so happened that quite a few SME owners are stock punters themselves, particularly in small caps that dominate the Growth Enterprise Market (GEM).
That is probably why the GEM index has been under persistent downward pressure lately: SME owners are forced to liquidate their stock investments for funds.
Last Thursday, the GEM index slumped 2 percent to a nearly two-year low.
This article appeared in the Hong Kong Economic Journal on June 2
Translation by Julie Zhu
[Chinese version 中文版]
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