Policymakers in Beijing had a tough question to answer ahead of this year’s Golden Week holiday: Had China’s economy strengthened enough to withstand higher interest rates as well as a more restrictive stance toward the property sector, one of the most important drivers of growth?
While the world’s second-biggest economy appears to have accelerated since August, it’s too early to say that it is completely out of the woods given the lukewarm performance in the industrial sector. Nonetheless, Beijing could no longer afford to sit and watch the speculative blaze raging through China’s housing sector as well as its bond market.
Under the threat of a growing housing market bubble characterized increasingly by panic buying and manipulative sales tactics, China chose this year’s weeklong national holiday as an inflection point to reinstate stern property measures. At least 19 major cities across the country introduced measures to curb second homeownership. Nanjing, for instance, is limiting singles to the ownership of only one property to counter the trend of people faking divorces to speculate in the market.
Weighing in on the efforts of regional governments, the housing ministry in Beijing unveiled a blacklist of 45 offending developers and real estate agencies that were effectively cheating their customers, with the state mouthpiece Xinhua news agency warning this was only the beginning of something bigger. It also insisted that the blacklist is not a “tiger without teeth,” for all those hoping the crackdown might soon pass.
China’s property market was broadly relaxed during the second half of 2014 as it fell into the doldrums. These escalating regulatory moves come after the People’s Bank of China (PBOC), the country’s central bank, had been steadily pushing financing rates higher in its interbank borrowing market in the two-week run-up to the long holiday. This has widely been interpreted as aiming to squeeze out speculative bets in the nation’s buoyant domestic bond market fueled by previously depressed short-term borrowing rates.
Both the benchmark 7-day interbank repo rate and the overnight Shanghai interbank offered rate (Shibor) surged to new yearlong highs just before Golden Week. The 7-day repo rate, a widely followed gauge of liquidity in the financial system, rose as high as 2.75 percent on Sept. 29, two days before the holiday. Overnight Shibor settled above 2.3 percent on Sept. 30, a significant departure from the 2.0 percent it had hovered at for the first half of 2016.
The latest developments have an increasing number of China watchers predicting fully fledged monetary tightening to arrive as early as 2017, which, if it turns out to be true, would have a highly negative implication for China’s financial assets.
In the week before the long holiday, the PBOC conducted its biggest weekly cash withdrawals from participating banks and financial institutions in the money market since July. The central bank took away 420.1 billion yuan (US$63 billion) from the financial system by allowing more reverse-repurchase agreements to mature than the amount of liquidity injected through new issuance.
That came as a big surprise to the market as only in the preceding week, the PBOC had pumped in a whopping 670 billion yuan, the most since April.
The sudden turnaround in the direction of liquidity provision from the central bank, as well as recent PBOC official rhetoric, suggest the monetary authority wants to limit runaway debt growth, with Deputy Governor Yi Gang widely cited as saying that the goal is to bring down leverage ratio growth. The cost of short-term financing in the interbank market began climbing during August after the PBOC restarted the use of more costly 14-day and 28-day reverse repos — a tool for the central bank to lend out liquidity to the money market, for the first time since February.