Photographer: Billy HC Kwok / Bloomberg
Photographer: Billy HC Kwok / Bloomberg
There was a chill through China’s financial markets after the central bank pulled cash out of the banking system and an official warned of asset bubbles.
The People’s Bank of China drained about $ 12 billion through open market transactions on Tuesday. The decision was unusual in the weeks leading up to the Lunar New Year holiday, which falls in mid-February in 2021, as residents typically need more money to pay for seasonal travel and gifts. It also went against recently reports in Chinese newspapers that liquidity would not be tightened for the holidays.
While Tuesday’s pullout was small in itself, it added to signs that Beijing is becoming wary of how cheap and plentiful liquidity has fueled its surplus in the markets. Told PBOC adviser Ma Jun local media that the risk of asset bubbles – such as in the stock or real estate market – will persist if China does not shift its focus to job growth and inflation management.
Read: Pandemic-Era Central Banking Creates Bubbles Anywhere
The reaction has been particularly brutal in the Hong Kong stock market, where onshore funds supported a global rally. Mainland investors bought a net HK $ 250 billion ($ 32 billion) worth of Hong Kong stock this year through Monday, nearly 40% of last year’s total, and were buyers again Tuesday. The Hang Seng Index fell 2.7% from its highest level since June 2018, led by 6.7% dive into Tencent Holdings Ltd.
In mainland markets, a gauge of interbank funding costs rose 32 basis points to 2.74% on Tuesday, the highest level in a year. Futures on Chinese government bonds due in a decade were poised for their biggest drop since September, while the CSI 300 index of stocks in Shanghai and Shenzhen, which is nearing its 2007 highs, fell 2.1%.
“The PBOC wants to get investors out of the euphoria caused by the abundant liquidity in December,” said Xing Zhaopeng, an economist at Australia & New Zealand Banking Group. “The PBOC is unlikely to ease its wallet this week, which will make liquidity very tight over the month.”
PBOC Governor Yi Gang on Monday said the central bank will seek to support economic growth while mitigating risks to the financial system – a continuation of its existing policy stance. Yi said China’s overall debt / output ratio rose to about 280% late last year.
Tencent’s decline came after the stock rose 11% on Monday, the best day since 2011, to approach a market value of a trillion dollars. With over a billion people using its WeChat social media platform, Tencent is ubiquitous for Chinese investors who don’t have access to Hong Kong shares of rival Alibaba Group Holding Ltd. through the trade links.
– With the help of Jeanny Yu