International | Mar 09 2011
– Beijing to move to measure non-central bank funding
– CBA suggests RMB appreciation should thus move more swiftly
– Faster monetary policy tightening may also be implied
By Greg Peel
I'll take this opportunity to note once more that while most financial market participants refer to the “yuan” as China's currency its proper name is the “renminbi”. The word “yuan” roughly translates to “money” or “cash” so an English speaking equivalent might be “bucks” rather than “dollars”.
China has spent the past twenty years trying to emerge out of strict communism and into a form of capitalism while still maintaining a dictatorship. While still today we hear news of Beijing moving swiftly to censor news of MENA uprisings and disperse protests, each year brings China closer to a level of financial market reform which matches more closely to that of Western nations.
It's been a rocky road for China as it spent its earlier decades battling boom-bust-cycles and the noughties trying to keep growth from running away. It failed at that endeavour, allowed global imbalance to run amok and it was only the GFC which headed off a possible local bust once more. But Beijing has been learning.
The West has constantly been telling Beijing that if you want to play with the big boys then you'd better get your financial house in order. And that means opening up to the world a once closed shop. Beijing has been in no rush, however, given it currently holds the global economy somewhat to ransom. Steps have been taken and each month it appears Beijing is really starting to get the hang of this monetary policy thing.
Commonwealth Bank's global market research team notes the People's Bank of China has a mandate to (1) promote economic growth, (2) achieve full employment, (3) maintain price stability (ie control inflation), and (4) balance international payments. Note, in regards to (4), that the noughties boom saw China become America's biggest creditor and thus America China's biggest risk. To achieve these objectives, notes CBA, Beijing has sought to control interest rates, money supply and the level of renminbi (RMB) loans.
Note that the basis of Beijing's massive stimulus package as a response to the GFC was, outside of government infrastructure programs, extensive cheap loans to banks. Those loans did their job but also fuelled a speculative property bubble which Beijing has been at pains to try to control ever since. One learns by one's mistakes.
By tightening monetary policy extensively last year and this year, through measures including increased bank reserve requirements and interest rate increases, Beijing has sought to control the level of RMB loan growth. But as CBA notes, PBoC loans to banks are not the only source of funding for those banks in this brave new world. To consider banks' available funds as only PBoC loans, and those only that which are driving the economy, is to ignore the expansion of Western-style off balance sheet funding programs, bond issues, capital raisings et al that Chinese banks have now come to implement.
In other words, Beijing has been tightening monetary policy solely based on PBoC funds flows and failing to appreciate that in capitalist markets, banks do not live on central bank funding alone.
But not anymore. CBA notes the PBoC has taken another step towards financial market maturity by now seeking to measure the extent of overall funding in the economy – not just its own. In so doing, the PBoC will have a better handle on what monetary policy steps are necessary. And importantly, the move will bring China more into line with the statistical requirements of the International Monetary Fund.
In recent times, seeking to address the global imbalance and China's credit risks offshore, Beijing has quietly opened the door to foreign investment and allowed outside purchase of RMB bonds. This is a step along the path, but as CBA notes China will not be able to enjoy acceptance as a viable sovereign bond issuer until such time as the RMB is released from the shackles of its US dollar peg. The development of a swap market with other central banks will need to be accompanied by a broader based and more rapid rate of RMB appreciation in 2011, and that's just what the CBA analysts expect will happen.
In so doing, the RMB would be on the path to a viable alternative reserve currency, which is just what Beijing would love to see.
So the good news is that China should now move closer to satisfying the rest of the world that global funds can be rebalanced back toward some form of equilibrium which, for example, would reduce the need for QE3 by the Fed and thus alleviate inflation pressures.
But in terms of near term market risk, consider that PBoC loans to banks in 2010 amounted to about 8 trillion RMB reports CBA, down 1.7 trillion RMB from the year before under tighter monetary policy, but non-PBoC funding reached 3.5 trillion RMB. In other words, the new measure of total funds must, by definition, increase Beijing's need to further tighten policy, to fight inflation and to slow economic growth.
And that, in the short term, is not good news for an Australian economy totally reliant on commodity exports to China, even though a longer term global rebalance reduces the one-trick pony's risk of a spectacular recession based on a Chinese bust.
