China’s central bank just took 20 billion yuan ($3 billion) out of state-owned banks by forcing them to purchase packages of central bank bills, Shanghai Daily reports. The list of banks required to make the purchases includes the Commercial Bank of China, China Construction Bank, and The Agricultural Bank of China.
One bond market trader said that this move was a way for the government to punish banks for lending too much money during August. It’s also, conveniently, a way to sop up extra cash in the economy.
At the same time, the central bank has told banks to include their margin deposits in required reserves at the central bank, which pulls an additional 800 to 900 million yuan ($125.23-140.89 million) from the banking system.
That isn’t to say that this will fix China’s liquidity problem– In fact, sources close to matter are calling this “a warning” to state banks. The government made much of the fact that China’s inflation cooled by 0.3% between July (6.5%) to August (6.2%), saying that it was a sign that monetary tightening measures are working.
Perhaps to an extent, but according to Ben Simpfendorfer of Silk Road Associates (via FT beyondbrics) none of this has stopped private banks from lending faster and then speculating on those loans.
(The fact that medium- to long-term loans as a share of lending by the state banks has soared 8 percentage points since the crisis is another indication that even when the state banks do make loans, it’s primarily to other state agencies).
The implication is greater systemic risk, as the private banks increase their exposure to imbalances in (principally) the property sector. And the fact we know little about the banks, other than knocking on their doors, only worsens the problem.
While worries about a hard landing in the coming months are exaggerated, the private banks are just one more in a growing laundry list of imbalances that the incoming leadership will need to grapple with in order to avoid a hard landing.
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