On July 17, the Chinese central bank has issued the Bidding Result for the Term Deposits at Commercial Banks in Central Treasury Cash Management (7th Issue). The central bank injected RMB 150 billion to commercial banks for a period of three months; the annualized bid-winning rate is 3.7%.
In general, central treasury funds will be deposited with the central bank to obtain lower interest rates. In order to maintain market liquidity, the central bank will regularly put the money that is temporarily unavailable in the central treasury into commercial banks through tendering and deposits. This has two major purposes; the first is to make the central government's financial funds more profitable; the second is to place the base currency into the market. According to the current currency multiplier of approximately 5.4, through the central treasury cash management commercial bank term deposits for the release of RMB 150 billion; theoretically this can derive RMB 810 billion broad money M2.
More importantly, the central bank not only can release liquidity through the "Term Deposits at Commercial Banks in Central Treasury Cash Management", but also deliver the views on interest rate and guide the direction of market interest rates. The size of the treasury cash bidding reached a new peak in the year, but the interest rate level hit a new low, lower than the previous six similar deposits, which was nearly 100 basis points lower than the average interest rate of the national treasury cash bidding. From the market perspective, this is an important signal that the central bank has once again sent the market to guide the interest rate down.
Judging from the interest rate signal of the treasury fund bidding, the central bank is trying to loosen the currency through various currency instruments as much as possible without adopting the policy of using all sorts of currency tools to loosen the currency without lowering the benchmark interest rate and not reducing the overall ratio, not the measure known colloquially as "irrigation with huge amount of water". This is the "small scoops of water" modus operandi summarized by Anbound. The measure can be flexibly controlled, and if this does not work, the authority can change to "bigger scoops of water". Judging from the trend of financial policy, the policy is gradually easing.
Anbound has predicted the direction of China's future economic policy from the perspective of analyzing the trend of the country's economic system. Our basic view is that the extremely complicated transformation adjustments faced by the Chinese economy and the changes in the economic and trade situation locally and internationally, in order to alleviate many problems in China's economic and social development, China might need to adopt the policy of "major release", that is releasing RMB 30 trillion to RMB 50 trillion liquidity to revitalize the Chinese economy having difficulty in transition, stimulate China's domestic demand market, expand the consumption, and deepen various reforms to achieve social development goals such as poverty alleviation, generate more space and provide more resources.
The strategic proposal Anbound introduced at the end of 2017 which can be seen as a policy pre-judgment, was being questioned because in 2018 China's policy tone is still deleveraging, and many government officials at all levels believed that it was not feasible. In fact, Anbound's "abrupt" suggestion is a conclusion based on rational analysis of China's economic and social system. It should be pointed out that the "major release" we pointed out is not just a fiscal bond issue or a single monetary policy; it also includes the easing of two policies and the liquidity that the easing policy further creates through various multiplier effects. It can be said that macroeconomic easing has become a necessity.
Ironically, when the China was still debating whether the easing policy is possible, foreign capital had already decided that China will certainly relax and began to take action. According to market participants, at the end of 2017 and the beginning of 2018, Chinese banking institutions were in fear under the talk of financial deleveraging. The interest rate rise was expected to be strong, and the institutions that set up interest rate debts were "rare". However, foreign capital had been successful in bottom fishing, and firmly insisted on increasing its holdings. According to the newly released bond custody data of June 2018 issued by China Government Securities Depository Trust & Clearing Co. Ltd. and Shanghai Clearing House, foreign institutions have increased their holdings of RMB 198.4 billion in Chinese RMB from January to June, and holdings of their Chinese bonds reached RMB 308.8 billion, accounting for 81% increase in national debt in the first half of this year. This means that these foreign investors have become the biggest beneficiaries of China's liquidity easing because they have understood the trend.
The deterioration of the global trade environment and the intensified trade disputes between China and the United States have added new downward pressure on the current economic situation in China, and at the same time this made the macro policy of "major release" become more urgent. Using waterway as metaphor, the current Chinese economy is like a river with a wide water surface but a shallow water level; many waterways are silted up, and a lot of ships are stranded. Although it is important to clean the river and clear the broken ships at low water levels, this would take time and the authority would need to maintain the operation of the water transport system. If the authority can change its mind by greatly increasing the water level, the ships and navigation marks will be able to float, and the system will be adjusted and improved simultaneously; this might be more suitable for the current situation.
Final Analysis Conclusion:
The current situation faced by the Chinese economy has increased the rationale and urgency of launching the "major release" policy to increase liquidity.
