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Seeing past China’s ‘rogue-like’ behavior

By Paul Lin ζž—δΏθ―
During his visit to Japan over the past weekend, former White House senior adviser Steve Bannon said that the US and its East Asian allies must unify to constrain China’s “frightening, audacious and global ambitions.”
The statement implies that Bannon has seen through China’s innate rogue status. Western so-called “China experts” with their belief that propriety, justice, honesty and honor are part of Chinese culture have been manipulated into assisting China’s rogue behavior.
Here are some of the recent examples of China’s audacity.
The human rights situation in China is deplorable. Beijing’s “low-end” inhabitants have over the past few months been driven out of their homes and forced to live rough in the cold weather.
Still, on Friday last week the Chinese State Council issued a white paper saying that Chinese enjoy ample economic, social, cultural, civil and political rights, and the human rights situation is moving forward “like the spring breeze, full of vitality.”
Not long before that, the council also claimed that China is the world’s biggest democracy.
China’s protectionism in its relationship with the US has resulted in an annual US trade deficit with China of almost US$500 billion. Still China continues to steal US intellectual property and Chinese President Xi Jinping (ηΏ’θΏ‘εΉ³) shamelessly continues to blame the US for being protectionist while he pursues global leadership.
When US President Donald Trump visited China, China offered a “great gift” by relaxing restrictions on foreign investment in Chinese banks, but Chinese banks are being dragged down by domestic debt and will now drag foreign capital down with them.
China is engaged in unrestricted military expansion: It issues belligerent statements, its navy passes between the Japanese islands through the Miyako Strait and the Tsushima Strait, and it has said that the Sea of Japan is not a Japanese sea.
This militarist expansion is forcing Japan to increase the strength of its self-defense forces, only to be criticized by China for reviving Japanese militarism.
When South Korean President Moon Jae-in visited China, he made a point of currying favor with Xi and accepted Xi’s talk about the two countries being part of a “shared community.”
A visiting South Korean photographer was being beaten up by Chinese police and less than 72 hours after Moon agreed to being part of a shared community, the People’s Liberation Army Air Force entered South Korea’s air defense identification zone to take advantage of “shared community airspace.”
After the Cultural Revolution, China was on the brink of default. Taiwanese and Hong Kong businesspeople brought capital, technology and management know-how to China and were followed by other foreign investors, helping China’s development.
Now China is treating Hong Kong and Taiwan as “low-end” regions.
China has also changed its attitude toward other investors: In addition to being provocative, it is now demanding that foreign businesses in China set up Chinese Communist Party (CCP) branches in their companies.
China has forgotten who helped it grow strong and is now acting like a bully.
Bannon is calling for leaders to avoid the Thucydides trap — when a rising power causes fear in an established power which escalates toward war.
I am currently reading Herman Wouk’s War and Remembrance, which uses the Thucydides trap to impart an important lesson: Democracy best meets our thirst for freedom, but a lack of discipline, as well as disorder, and the desire for ease and comfort often drive us toward autocracy.
This is a warning that no democracy, including Taiwan, must forget.
Paul Lin is a political commentator.
Translated by Perry Svensson
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BEIJING (AFP) - The International Monetary Fund (IMF) on Thursday (Dec 7) warned of brewing risks in China's banking system as it found dozens of crucial lenders needed to beef up their defences against possible financial crises.

 The IMF report comes a day after regulators in Beijing drafted new rules to strengthen bank funding, and follows a number of alerts about a ballooning debt problem in the world's No. 2 economy.

 Near the top of the list in the IMF study on the stability of China's financial system is the need for banks to increase their capital to ward off risks from mounting debt.
China has largely relied on debt-fuelled investment and exports to drive its tremendous economic growth, but the Fund said this model has reached its limits.

 Part of the problem lies in high growth targets, the IMF said, which incentivise local governments to extend credit and protect failing companies.

 "We recommend the authorities to de-emphasise the GDP (growth)," Ms Ratna Sahay, deputy director of the IMF's Monetary and Capital Markets Department, said during a news conference.

 China should "incite local governments to strengthen supervision on risks", she added.

 Abundant credit allows local governments to hit high growth figures but now each extra dollar of debt is producing diminishing returns.

 The ballooning debt - estimated at 234 per cent of gross domestic product by the IMF - adds financial risk and may weigh on China's future economic growth.

 "Credit growth is an important indicator of future financial distress, because lending standards often fall in the rush to make more loans," IMF experts warned in a blog post.

 The Fund's experts carried out stress tests on dozens of banks.

 China's big four banks had adequate capital but "large, medium, and city-commercial banks appear vulnerable", the IMF said.

 It added that 27 out of the 33 banks tested - accounting for three-quarters of China's banking system assets - were "undercapitalised relative to at least one of the minimum requirements".

 While the country's banking system meets the requirements of global banking rules known as Basel III, "current circumstances warrant a targeted increase in capital", the report said.

 "This would create a buffer to absorb potential losses that can be expected during the economic transition as credit is tightened and implicit guarantees are removed."

 China's central bank said it disagreed with "a few descriptions and views" in the report.

 "The descriptions of the stress testing did not fully reflect the outcomes of the test," the People's Bank of China said on its website.

 The China Banking Regulatory Commission on Wednesday (Dec 6) released a draft of fresh rules to tackle related issues.

 The latest regulations call for new indicators to monitor commercial banks' liquidity and set related requirements.

 They will "strengthen management of liquidity risk for banks and protect the safety and stability of the banking system", the commission said.

 In some cases local banks face pressure to lend to politically important companies, as local governments aim to maintain high employment even if that means cash-bleeding enterprises continue to operate.

 These loss-making firms, often state-owned, have come to be known as zombie companies, and banks and investors fund many of them as if they will not be allowed to fail.

 "Implicit guarantees and the government's desire to support growth encourage these firms to invest excessively, raising already-high leverage while weakening performance on profitability and debt service capacity," the Fund wrote in a recent report.

 In October, it warned China's dependence on debt was growing at a "dangerous pace" and needed to act to avert a crisis.

 That came weeks after the Bank for International Settlements - dubbed the bank of central banks - said the banking sector could be facing an imminent blowout, raising worries about its effect on the world economy.

 The IMF's latest assessment said financial engineering helped banks obscure the potential losses.

 "Implicit guarantees to SOEs (state-owned enterprises) need to be removed carefully and gradually," Ms Sahay said.

 "It would be wise to have a high-level committee to monitor the risks across all sectors."
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INILAHCOM, Beijing - Kurs tengah nilai tukar mata uang Tiongkok renminbi atau yuan, melemah 131 basis poin menjadi 6,6076 terhadap dolar AS pada Selasa (26/9/2017), menurut Sistem Perdagangan Valuta Asing Tiongkok.
Di pasar spot valuta asing Tiongkok, yuan diperbolehkan untuk naik atau turun sebesar dua persen dari tingkat paritas tengahnya setiap hari perdagangan.
Kurs tengah yuan terhadap dolar AS didasarkan pada rata-rata tertimbang harga yang ditawarkan oleh pelaku pasar sebelum pembukaan pasar uang antar bank setiap hari kerja. [tar]
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Jakarta detik- Pemerintah China tidak terima dengan keputusan Standard & Poor's (S&P) Global Ratings yang baru saja memangkas peringkat utang China. Keputusan tersebut dianggap tidak mempertimbangkan kondisi fundamental ekonomi China dan potensi ke depan.

Demikianlah pernyataan Kementerian Keuangan China seperti dilansir dari Reuters, Jumat (22/9/2017).

Baca juga: Banyak Risiko, S&P Pangkas Peringkat Utang China

S&P memangkas peringkat utang China, khususnya untuk komponen jangka panjang dari A+ menjadi AA- dengan alasan semakin tingginya risiko ekonomi akibat peningkatan utang yang terlalu cepat.

Pemerintah China memastikan pertumbuhan kredit sesuai dengan kondisi fundamental yang ada. Pemerintah juga telah mengantisipasi risiko keuangan melalui langkah stabilitas sistem keuangan dan dukungan terhadap ekonomi rill China. (mkj/dnl)
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Bisnis.com, JAKARTA – Ketergantungan ekonomi China pada utang yang terlalu besar serta ledakan hebat risiko kredit mengantarkan negara dengan ekonomi terbesar kedua di dunia tersebut menuju krisis finansial baru.

 Pada Juli 2017, Dana Moneter Internasional (IMF) memperkirakan Produk Domestik Bruto (PDB) China akan tumbuh 6,7% tahun ini dan 6,4% pada tahun 2018.

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Angka itu direvisi naik dari proyeksi IMF sebelumnya sebesar 6,6% dan 6,2% untuk masing-masing periode. Pertumbuhan global yang lebih kuat disebutkan memberi dorongan terhadap China.

 Namun IMF mengingatkan tumbuhnya risiko-risiko dalam beberapa tahun mendatang seiring menggelembungnya utang China. Pertumbuhan di China memang telah disangga lonjakan utang yang tumbuh cepat dalam beberapa tahun terakhir.

Utang China menggelembung/telegraph.co.uk-IMF
Pertumbuhan ekonomi beberapa tahun terakhir terlalu bergantung pada banyaknya pinjaman. Utang pun tumbuh lebih cepat daripada keseluruhan ekonomi selama lima tahun terakhir.

 “Kredit nominal ke sektor nonfinansial meningkat lebih dua kali lipat dalam lima tahun terakhir, dan total rasio kredit terhadap PDB nonfinansial domestik meningkat 60 poin persentase menjadi sekitar 230% pada 2016,” jelas IMF dalam laporannya, dikutip dari laman The Telegraph, Rabu (16/8/2017).

 Utang tersebut diperkirakan akan meningkat menjadi hampir 300% dari PDB pada 2022.

 “Pertumbuhan berkelanjutan, yang dapat dicapai tanpa ekspansi kredit yang berlebihan, kemungkinan jauh lebih rendah daripada pertumbuhan aktual selama lima tahun terakhir,” papar sejumlah analis IMF.

 Menurut perkiraan IMF, apabila kredit tumbuh pada tingkat yang berkelanjutan, PDB akan dapat meningkat rata-rata 5,3% per tahun dari tahun 2012 sampai 2016, alih-alih mencapai 7,3%.

 “Pengalaman internasional menunjukkan bahwa lintasan kredit China saat ini terlihat berbahaya dengan meningkatnya risiko penyesuaian yang mengganggu dan/atau perlambatan pertumbuhan,” tulis laporan tersebut.

 Analis IMF mempelajari 43 ledakan kredit yang besar dan menemukan bahwa hampir setiap kasus menghasilkan perlambatan tajam atau krisis finansial. Semua ledakan kredit yang dimulai saat rasio di atas 100%, seperti halnya kasus China, berakhir dengan buruk.

Grafik utang China/Telegraph.co.uk-IMF
“Sebagian pembayaran utang dilakukan melalui struktur pendanaan yang sangat kompleks dan terutama berjangka pendek. Kemudian meluas ke dana deposito hingga pasar antarbank dan produk wealth management, serta melalui jaringan entitas yang kompleks dan saling terkait,” jelas laporan tersebut.

 IMF meyakini bahwa utang tambahan dalam beberapa tahun terakhir juga telah digunakan dengan buruk, karena kredit yang diberikan ke sektor industri, perusahaan milik negara dan di wilayah tertentu belum diimbangi kenaikan nilai tambah para peminjam tersebut.

 Hal ini menunjukkan bahwa kredit telah digunakan relatif tidak efisien.

 IMF memperkirakan, pada 2015 hingga 2016 dibutuhkan kredit baru senilai sekitar 20 triliun renminbi untuk menaikkan PDB nominal sebesar hanya 5 triliun renminbi.

 Tingkat kegentingan apa pun dapat dibatasi surplus transaksi berjalan China dan rendahnya utang eksternal. Loan-to-deposit ratio yang rendah di bank-bank di negara tersebut juga dapat membantu menekan pukulan apa pun.

 Dalam laporannya ini, IMF mengacu pada pada krisis utang Amerika pada tahun 1980-an, krisis perbankan Jepang pada tahun 1997, serta pengalaman Amerika Serikat (AS) dan Inggris dalam krisis keuangan global sebagai contoh kejatuhan.

 Seperti diberitakan sebelumnya, jumlah utang pemerintah, rumah tangga, dan korporasi secara keseluruhan telah mencapai lebih dari US$28,8 triliun atau 258% dari produk domestik bruto.

 Bagian terbesar, sekitar US$17 triliun, terkonsentrasi pada neraca perusahaan, terutama perusahaan-perusahaan milik negara yang menghasilkan barang mulai dari baja sampai batu bara, perusahaan konstruksi, dan pengembang properti.

 Permasalahan ini mendesak peran Presiden Xi Jinping untuk dapat mengatasi ledakan utang. Jika tidak, dampaknya dapat memicu krisis finansial sekaligus menimbulkan gejolak di seluruh ekonomi global.

 Simak juga Mampukah Presiden China Xi Jinping Redakan Lonjakan Utang?
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bloomberg: China raised its holdings of U.S. Treasuries for a fourth straight month, a sign the nation is rebuilding its foreign-currency reserves as the yuan stabilizes.

 China, the second-largest holder of Treasuries, held $1.10 trillion in May, up $10 billion from a month earlier, according to Treasury Department data released Tuesday in Washington. Japan, the biggest holder, owned $1.11 trillion, up slightly from its total in April.

 The two countries account for more than one-third of all foreign ownership of Treasuries, which gained by $49.9 billion in May to $6.12 trillion, the figures showed. Of that total, $3.94 trillion were government holdings.

 China’s foreign-exchange reserves rose for fifth straight month in June as the currency stabilized and investors were less eager to move money abroad. Stricter capital controls and a stabilizing yuan this year have eased outflow pressures as policy makers encourage foreign investors to channel more money into the country.
The Treasury’s report, which also contains data on international capital flows, showed a net inflow into U.S. long-term securities of $91.9 billion after a $9.7 billion inflow in April. It showed a total cross-border inflow, including short-term securities such as Treasury bills and stock swaps, of $57.3 billion following a $74.4 billion inflow the prior month.
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BEIJING: China’s foreign exchange reserves edged up in June for a fifth consecutive month, in line with market expectations, as capital outflows eased in the face of tighter regulations and the dollar’s rally paused.
Reserves rose $3.2 billion during June to $3.057 trillion, in line with economists’ forecast in a poll conducted by Reuters.
The reserves rose by $24 billion in May to $3.054 trillion. It was the first time that reserves had climbed for five months in a row since June 2014, and marked its highest level in eight months.
“China’s foreign exchange reserves suggest that outflow pressures may have eased last month,” wrote Julian Evans-Pritchard, China economist at Capital Economics, adding that June could mark the first month since October 2015 in which the People’s Bank of China (PBoC) was a net buyer of foreign exchange.
He estimated that China’s capital outflows dropped to roughly $10 billion in June from $29 billion in May.
The country’s foreign exchange regulator said that the slight increase in reserves in June was driven by stronger non-dollar currencies against the greenback.
China’s foreign reserves will remain stable as cross-border capital flows become more balanced, the State Administration of Foreign Exchange (SAFE) said in a statement following the data release.
China burned through nearly $320 billion of reserves last year but the yuan still fell about 6.5 percent against the dollar, its biggest annual drop since 1994.
Faced with an entrenched bearish yuan view, Beijing moved swiftly over the past few months to flush out speculators, quash expectations of a further steep depreciation and safeguard its reserves.
That strategy to head off risks to the economy from capital outflows seems to have worked so far, with the yuan up about 2 percent against the dollar this year.
In May, net foreign exchange sales by the PBoC fell to the lowest in nearly two years as the yuan stabilized.
China also recorded a surplus in its capital and financial account in the first quarter, data from the foreign exchange regulator showed, indicating net capital inflows as policymakers tightened supervision of outflows.
However, French investment bank Natixis said in a report that its capital flow tracker for China showed outflows for the second quarter would rise to $144.1 billion, reversing the trend in the first quarter.
The tighter grip on capital flows has also become a setback for China as it has been aspiring to turn the yuan into a global currency.
Traders said some major state-owned banks were spotted selling dollars in the market this week, a trend seen over the past few months in what analysts believe is part of official efforts to stabilize the yuan.
Still, the yuan is forecast to weaken to 7.05 per dollar in 12 months, according to a Reuters’ poll of more than 50 foreign exchange analysts taken in June.
The yuan is predicted to trade at 6.95 per dollar by the end of this year, compared with 7.2 per dollar forecast at the beginning of the year.
The value of gold reserves fell to $73.585 billion at the end of June, from $75.004 billion at end-May, data published on the PBoC website also showed.
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kontan: BURSA saham Asia sebagian besar ditutup lebih tinggi pada perdagangan Rabu (24/5). Setelah lembaga pemeringkat Moody menurunkan peringkat utang China dan pelaku pasar menunggu rilis risalah Federal Reserve serta hasil pertemuan OPEC.
Mengutip CNBC, indeks Nikkei 225 naik 0,66 % atau 129,7 poin menjadi ditutup pada 19.742,68. Sementara, Kospi naik 0,24 % atau 5,6 poin menjadi berakhir di 2.317,34. Indeks acuan Australia S & P / ASX 200 mengakhiri sesi ini lebih tinggi sebesar 0,15 % atau 8.809 poin di 5.769.
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Indeks Hang Seng turun 0,14 % pada pukul 3:02 siang HK / SIN. Shanghai Composite membalikkan penurunan sebelumnya menjadi ditutup 0,06 % atau 1,8434 poin lebih tinggi pada 3.063,7904 sementara Komposit Shenzhen naik 0,525 % atau 9,4016 poin menjadi berakhir di 1.798,8692.
Moody's Investor Service menurunkan peringkat utang China menjadi A1 dari Aa3, dan mengubah outlook menjadi stabil dari negatif.
Moody's mengatakan, rating ini merefleksikan ekspektasi bahwa kekuatan finansial China akan terkikis dalam beberapa tahun mendatang. Penyebabnya adalah perkiraan utang terus melebar sementara pertumbuhan ekonomi melambat.
"Moody's berekspektasi, program reformasi kebijakan akan melambat sementara tidak bisa menahan laju utang. Untuk mengejar pertumbuhan ekonomi, pemerintah diperkirakan akan terus mengandalkan stimulus, yang akan berkontribusi pada kenaikan utang secara keseluruhan," tulis Moody's, dalam rilisnya.
Dollar Australia tergelincir dari level di sekitar US$ 0,7480 ke level US$ 0,7452 setelah pengumuman tersebut. China termasuk di antara pasar ekspor terbesar di Australia.
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Bisnis.com, BEIJING— Cadangan devisa China berhasil melanjutkan kenaikannya untuk tiga bulan berturut-turut dengan melonjak di atas ekspektasi pasar pada bulan lalu.

 Bank Sentral China (PBOC) melaporkan, cadangan devisanya naik US$21 miliar menjadi US$3,03 triliun pada April. Kenaikan itu melonjak dari catatan pada bulan sebelumnya yang hanya naik US$3,96 miliar menjadi US$3,009 triliun. Adapun, Reuters dalam survei yang dilakukan kepada para analis dan ekonom memprediksi kenaikan cadangan devisa Beijing sebesar US$11 miliar menjadi US$3,02 triliun.

 Lonjakan cadangan devisa pada April tersebut, menurut PBOC, disebabkan oleh kebijakan kontrol arus modal keluar yang ketat dan terhentinya reli pada dolar AS. Hal itu membuat arus modal keluar dari China relatif stabil dan membuat yuan kembali menguat.

 “Cadangan devisa naik karena pasokan dan permintaan pada valuta asing pada dasarnya relatif seimbang. Selain itu apresiasi yuan terhadap dolar AS juga turut memberikan efek positif bagi kami,” tulis PBOC dalam keterangan resminya, seperti dikutip dari Reuters, Minggu (7/5/2017).

 PBOC sendiri meyakini, ke depan, nilai tukar yuan akan terus mencatatkan pergerakan yang stabil. Di sisi lain, arus modal lintas batas diprediksi juga akan lebih seimbang sehingga akan mendukung stabilitas pada cadangan devisa nasional.

 Sebelumnya, keyakinan pada kinerja mata uang Negeri Panda telah diungkapkan oleh Perdana Menteri China Li Keqiang. Dia mengklaim kepercayaan pasar global pada yuan terus menguat sepanjang tahun ini.

 Sumber : Reuters/Bloomberg


Bisnis.com, JAKARTA--Harga aluminium diprediksi mengalami tren bullish dan mencapai level US$2.100 per ton pada akhir 2017 seiring dengan pengurangan suplai dari China sebagai produsen sekaligus konsumen terbesar di dunia.
Pada penutupan perdagangan Jumat (3/3), harga alumunium di London Metal Exchange turun 19 poin atau 0,09% menjadi US$1.892 per ton. Angka ini menunjukkan kenaikan 11,75% sepanjang tahun berjalan (year ton date/ytd), tertinggi dibandingkan logam lainnnya.
Tahun lalu, harga aluminium tumbuh 12,34%. Per 30 Desember 2016, harga berada di posisi US$1.693 per ton.
Jeffrey Currie dan Yubin Fu, analis Goldman Sachs Group Inc., memaparkan rencana China memangkas produksi aluminium dan alumina menjadi faktor utama yang mengubah peta pasar.
"Kebijakan yang bertujuan mengurangi polusi udara ini diperkirakan membuat pasar global mengalami defisit pasokan, sehingga harga bakal menguat," paparnya dalam riset, Senin (6/3).
Pengurangan produksi diperkirakan mencapai 1 juta ton pada 2017, dan bertambah menjadi 2 juta ton pada 2018. Dalam dua tahun ini, rerata defisit pasar aluminium sekitar 300.000 ton per tahun.
Sebelumnya, Ministry of Environmental Protection (MEP) China mengarahkan pelaku usaha agar mengurangi poduksi sekitar 30% untuk industri smelter aluminium dan sejumlah 50% untuk industri penyulingan di provinsi Shandong, Shanxi, Hebei, dan Henan. Kebijakan ini berlangsung mulai November 2016 sampai dengan Maret 2017.
Keempat provinsi ini berkontribusi terhadap 20% total produksi aluminium global. Oleh karena itu, harga logam anti karat ini berada dalam tren bullish.
Goldman memprediksi, harga pada akhir kuartal I/2017 mencapai US$1.950 per ton, kuartal II/2017 US$2.00 per ton, dan kuartal terakhir senilai US$2.100 per ton.
Jeffrey Currie dan Yubin Fu menambahkan, sebetulnya selain karena faktor lingkungan, kebijakan pengurangan produksi China bertujuan menguatkan harga di tingkat global.
"Dengan reformasi dari sisi suplai, harapannya kinerja perusahan alumunium dan alumina meningkat, sehingga turut menyeimbangkan neraca perbankan," ujar keduanya.
Berdasarkan data Bank Dunia, China merupakan produsen sekaligus konsumen aluminium terbesar di dunia. Pada 2015, produksi Negeri Panda mencapai 31,41 juta ton dari total global 57,34 juta ton, sedangkan konsumsi sebesar 31,07 juta ton dari total global 57,08 juta ton.
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bloomberg: China’s foreign currency holdings fell for a sixth month in December, bringing last year’s drop to $320 billion as the yuan posted its steepest annual slide in more than two decades.
Reserves decreased $41.1 billion to a fresh five-year low of $3.01 trillion, the People’s Bank of China said Saturday. That was in line with estimates in Bloomberg’s survey of economists.
The central bank’s effort to stabilize the yuan was the main reason for the drop last year, the State Administration of Foreign Exchange said in a statement. The world’s largest stockpile has fallen for 10 straight quarters from a record $4 trillion in June 2014, while eroding confidence in the yuan has pushed the currency to the lowest levels in eight years.

With a light calendar over the past week, the offshore Yuan rate (CNH) extended losses against the US Dollar for the third consecutive week, testing a key support level at the 38.2% retracement level of the January decline. The onshore Yuan rate (CNY) dropped 0.36% against its US counterparty this week, following weakened daily reference rates set by the PBOC. The Central Bank has been injecting a significant amount of liquidity over the past week but the liquidity shortage remains unresolved. This further increases the probability of the Central Bank cutting the reserve requirement ratio (RRR) in the near term. A window will be opened for such rate cut after US Fed releases its benchmark rate on April 27th.
Two things that happened this week have significantly increased the odds of China’s Central Bank cutting reserve requirement ratios (RRR). One is that the Central Bank has injected a large amount of cash through the Medium-term Lending Facility (MLF) and reverse repurchase agreements (repos). The other is that despite this added liquidity, the overnight Shanghai Interbank Offered Rate (SHIBOR O/N) still remains above 2.0%, which was a major threshold for previous rate cuts.
From the four instances of the PBOC’s RRR cuts in 2015 (excluding the RRR cut on target institutions) and one instance in 2016, we can see a pattern: Phase 1) the SHIBOR O/N rate approached or went above 2%. Phase 2) The Central Bank started to significantly increase temporary liquidity through tools such as MLF and repos. Phase 3) the SHIBOR O/N was still above 2% or was approaching 2% with an upward trend. Phase 4) The Central Bank adopted the permanent tool to increase liquidity, which is to cut the RRR. Phase 5) the SHIBOR O/N dropped below 2% or the upward trend reversed. We have seen Phase 1 to Phase 3 over the past two weeks and therefore, the probability to see Phase 4 is has increased.
Also, these past instances can give us some clues as to how much the rate might be cut if it happens. The SHIBOR O/N on one trading day before the rate cuts on 2/4/2015, 4/20/2015 and 2/29/2016 was 2.9544%, 2.2680% and 2.0480% respectively; the cut in RRR was 0.5%, 1.0% and 0.5% respectively. This indicates that the next rate cut may be at least 0.5% as the recent SHIBORs O/N were above the 2% threshold. The other two instances of RRR cut was 0.25% on 8/26/2015 and 0.5% on 10/24/2015. The overnight borrowing rate one trading day before was 1.8790% and 1.9090% respectively, both below 2%. This sample size is small but it may still reveal the logic behind the moves: The bank needs a certain amount of rate cuts (0.5%) to generate enough liquidity to allow SHIBOR to drop below 2% in order to reverse the upward trend.
Liquidity shortage is not only seen in the interbank market but also in Chinese equity markets of recent. The Shanghai Composite Index slid 2.3% this past Wednesday, which is the largest loss in seven weeks. Liquidity risk and credit risk are investors’ major concerns according to local financial institutions. This also gives the Central Bank incentive to provide more liquidity over the following periods. The probability of the Fed raising rates on the April 27th meeting remains very low at 0%. Therefore, the period after Fed’s meeting could be an opportune time for China’s Central Bank to make its moves. In turn, the Chinese Yuan may move to lower levels, and we initiate a bearish forecast for the currency.