It almost seems to be a case of traders seeing exactly what they want to see instead of believing their “lying eyes.” Money rates in China have declined in the past few days as speculation abounds that the PBOC reduced the interest rate on its rollovers of the second part of the Medium Term Lending Facility (MLF). The PBOC had targeted specific institutions first with CNY500 billion which matured in December and were rolled. The second piece, CNY269.5 billion, was up for renewal this month.
The whispers about the rate of the renewal are intense because there is still a great deal of confusion about what the PBOC is trying to accomplish. Conventional wisdom still seems to believe that the central bank “cut rates” back in November, but then contradicted that “stance” by tearing apart repo financing. So, this thinking goes, if the PBOC reduced the rate on the MLF rollover then it will signal further rate cuts, and thus “stimulus”, for the wider financial system.
Part of the problem here is that the PBOC has been absent from money markets for 13 consecutive trading days. That has left “traders” speculating about what the PBOC will do in terms of policy this year as growth continues to falter, and lending is reduced.
These wishes for broad expansion are simply that, as the PBOC continues to openlyreiterate its tact.
Vice-Governor Li Dongrong said in a short speech posted on the bank’s website that the bank will continue to pursue the government’s “prudent” monetary policy stance this year but will create an “appropriately neutral monetary environment”. The PBOC will also speed up interest rate reform and improve the yuan exchange rate formation mechanism, he said.
December credit data released earlier Thursday fell short of economist expectations, though domestic markets rallied on hopes that signs of dwindling capital inflows may finally push the central bank to cut the required deposit reserve ratio.
Li Dongrong’s speech should be enough so that the second paragraph quoted above never gets written – “dwindling capital inflows” is part of the intent of “reform.” Li is spelling out, yet again, that “targeted” monetarism is far different from the naked monetarism of the past. The PBOC is still engaging in reform which means it will not be giving these “markets” what they want. Continue reading →
Many for so long have proclaimed the end of the dollar and a collapse of the USD system. Though the dollar will be adjusted downward at some point in the initial implementation of a multilateral system, its sustainability in a broader monetary framework will be a fundamental corner stone to correcting the imbalances which originated from the USD system itself.
StealthFlation 
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