- By refusing to auction new reverse repo contracts, the PBoC is tightening monetary policy, on the margin, by allowing liquidity to drain from the financial system on a net basis (-102B CNY over the past 2W vs. a trailing 13W average of +29.7B CNY and +150B 3W ago).
- Aside from increased confidence stemming from the fact that the Chinese economy is on sounder footing, there are three primary reasons why the PBoC is implementing this strategy at the current juncture:
- Hawkish trends in the property market;
- Continued excesses in credit expansion; and
- A hawkish outlook for CPI over the intermediate term (unlike the politically compromised Fed, which uses lagging indicators to set monetary policy, the PBoC proactively adjusts monetary policy according to its growth and inflation outlooks).
Please note: If you have yet to review our SEP 25 note titled, “THE DEVELOPING BULL CASE FOR CHINA: PROGRESSING”, we encourage you to do so. The latter half of the report wraps some numbers around why we have yet to adopt an explicitly bullish fundamental bias on China after officially dropping what had been an overtly bearish bias back on SEP 6.
Feel free to ping us with any follow-up questions.
Associate: Macro Team