DeepState
Multi-Strategy, Quant and Fundamental
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- 30 March 2014
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I think that this was seen to be different because the injection was pushed into the major banks. SHIBOR O/N and 1 week actually rose to indicate that this injection is expected to remain outside of the system in that it is expected to be lent out with funding coming in at favourable levels. This is akin to TLTRO more than Open Market Operations where PBOC is providing (presumably) cheap finance to the majors for targeted lending. It was also channeled via the medium term SLF rather than injected into the Open Market Operations mechanism where most liquidity style operations in the interbank market take place - at least in Developed Market monetary systems.
Such a move is a response to declining credit stimulus. The targeting nature of the lending is the sort of thing you'd expect to see from a command economy and some would criticize this on the basis that the demand for credit is not satisfied via a market based method (what? Like the last seven years has been a great advertisement of that method).
This is a step up in monetary support mechanisms due to the targeted nature of it. It directly impacts the narrow money base, whereas RRR movements impact the multiplier and lending more broadly.
If I was to read into it, this is what I see. PBOC understands that credit is extended and wasted in significant ways. A broad brush approach and one channeled through local governments has led to overinvestment in capital works. Their pricing mechanism doesn't work because incentives are stuffed (unlike Greenspan's view of the world in relation to self interest...yeah). So they need to support the economy and are doing so fiscally, but need monetary support. So, like Chinese, they move to tighter lending and take a controlled deployment of resources.
You can take the view that this move is a concerning one because it indicates that PBOC is showing that credit is reaching tipping points. Alternatively, it is a more targeted way of addressing falling credit growth and hopefully lifting credit quality of loans offered.
This is a big dollar move, but small monetary stimulus in the scheme of things (including to the recipient banks). I would guess that they are 'crossing the river by feeling the stones' and will give this a whirl. So you could take the positive view that they are being proactive to a problem that seemed to have no solution other than a bad one.
A case of watch this space, I guess. At least they are experimenting with new ideas in a measured way.