Photographer: Billy HC Kwok / Bloomberg
Photographer: Billy HC Kwok / Bloomberg
A chill swept through the Chinese financial markets after the central bank withdrew money from the banking system and an official warned of asset bubbles.
People’s Bank of China drained about $ 12 billion through open market operations on Tuesday. The decision was unusual in the weeks before the Lunar New Year holiday, which in 2021 falls in mid-February, because residents typically need more money to pay for seasonal travel and gifts. It was also against recent Chinese newspaper reports that liquidity would not be tight before the holiday.
Although Tuesday’s withdrawal was small in isolation, it added signs that Beijing is concerned about how cheap and plentiful liquidity has fueled excess markets. PBOC advisor Ma Jun said local media that asset bubble risks – such as in the stock market or real estate – will remain if China does not shift its focus to job growth and inflation management.
Read: The pandemic-era central bank is creating bubbles everywhere
The reaction was particularly brutal in the Hong Kong stock market, where onshore funds were helping to sustain a global recovery. Mainland Chinese investors bought Hong Kong shares for a net worth of HK $ 250 billion (US $ 32 billion) this year through Monday, almost 40% of last year’s total, and returned to buyers on Tuesday. The Hang Seng Index fell 2.7% from its highest level since June 2018, led by 6.7% diving at Tencent Holdings Ltd.
In mainland markets, an indicator of interbank lending costs jumped 32 basis points to 2.74% on Tuesday, the highest level in a year. Chinese government bond futures maturing in a decade are expected to show the biggest drop since September, while the Shanghai and Shenzhen stock index CSI 300, which is close to the 2007 record, fell 2.1%.
“PBOC wants to lift investors out of the euphoria caused by plentiful liquidity in December,” said Xing Zhaopeng, economist at Australia & New Zealand Banking Group. “The PBOC is unlikely to loosen the purse strings at least this week, which will make last month’s liquidity very tight.”
PBOC Governor Yi Gang on Monday he said the central bank will seek to support economic growth while limiting risks to the financial system – a continuation of its existing policy position. Yi said China’s total debt-to-product ratio rose to around 280% at the end of last year.
Tencent’s fall came after inventory rose 11% on Monday, its best day since 2011, to approach the market value of a trillion dollars. With more than a billion people using its WeChat social media platform, Tencent is ubiquitous for Chinese investors who do not have access to rival Hong Kong shares Alibaba Group Holding Ltd. via commercial links.
– With the help of Jeanny Yu