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By Anthony Barton
LONDON (MNI) - Last week, the global focus fell firmly on the "green
shoots" of recovery springing across China's economy. Fast forward not even 10
days and we have had soggy European and South Korean data, a swathe of global
central banks turning dovish and more guarded activity in the Chinese financial
At least on the Chinese markets side, the cause seemingly lies in the
statement issued at the end of last Friday's Politburo meeting.
The statement appeared to indicate a focus on longer term structural reform
in China, alongside targeted measures, as opposed to supporting the economy
through broad based stimulus. The statement also dropped a reference to "keeping
liquidity reasonably ample."
This has been followed up by the PBOC with a round of the Targeted
Medium-Term Lending Facility, the second of its kind since inception late last
year, with policymakers highlighting that we should now expect such operations
on a quarterly basis. Elsewhere, the PBOC has outlined provisions to promote
further targeted lending, giving credence to the idea that policymakers aim to
focus more on efforts that will feed through to the real economy, in turn
avoiding the effects of "flood-like" stimulus.
On the liquidity front, this week's open market operations drained some
CNY300bn out of the system after the central bank added CNY300bn last week. As a
reminder, last week's MLF injections only resulted in a near 55% rollover of the
Tighter liquidity was highlighted in the latest MNI China Liquidity Survey,
with 64.3% of survey respondents noting a deterioration on the previous month --
albeit slightly lower than the 71.4% who saw tighter conditions in March, but
still representing a cumulative tightening in liquidity measures.
This has left Chinese equity markets on the defensive after the recent
stellar run higher, as investors remain wary of tighter purse strings in the
case of both the PBOC and the government.
In the fixed income market, the pullback in Chinese equities has allowed
CGBs to stabilise, with 10-Year yields around 4.0bp off their recent highs, but
still sitting close to 35bp higher than they did at the end of March.
U.S. Dollar/Yuan crosses remain range bound, although the WSJ has pointed
to the potential for an onshore USD shortage in China, while Chinese President
Xi noted that China "won't pursue yuan depreciation that harms others" as he
pledged to keep the currency at a stable level around equilibrium. This was
enough to push USD/CNH comfortably back into its recent range after a look above
Looking ahead, the global focus remains on the health of the Chinese
economy. One Shanghai trader noted that the positive economic expectations would
push China yields higher for a while, but they would reverse as the overly
optimistic mode gets corrected, underlining doubts among some traders over the
sustainability of the recovery.
--MNI London Bureau; tel: +44 203-586-2225; email: firstname.lastname@example.org