Europe is waking up to falling shares across Asia this Thursday morning:
The reason?
From the central bank of China’s website:
Those are the offered terms of a 60bn yuan ($8.8bn) auction of three-month Chinese bills. And the yield — that 1.3684 per cent figure — is the thing that’s sent Asia’s markets into a tizzy this morning.
Here’s the basic summary, from Yahoo News:
SHANGHAI, Jan 7 – China’s central bank surprised the market and raised the auction yield of its three-month bills for the first time since mid-August in its regular open market operation on Thursday, signalling a significant step-up of its tightening of market liquidity.
The People’s Bank of China auctioned 60 billion yuan ($8.8 billion) of three-month bills at a yield of 1.3684 percent, up 4.04 basis points from 1.3280 percent last week and the level that it had kept over the past four months.
Together with the central bank’s Wednesday comments, that it plans to “moderate” loan growth for 2010, and the sheer scale and impact of China’s recent liquidity and loan growth-boosting operations, you can see why markets might be worried about an impending tightening.
But there are those, such as Monument Securities Marc Ostwald, who are warning that the move this morning is rather overdone:
Last but not least there is the small 4 bps rise in the Chinese 3-mth Bill rate to 1.36, which has clearly sent some small shockwaves through Asian markets, though it is very notable that the reaction has been much stronger in offshore markets than onshore Chinese markets, where the long end of the Chinese bond market was unchanged, while offshore Non-deliverable Forward Interest Rate Swaps saw a 12 bps spike in the 1-yr rate to 2.19. This is rather more indicative of a lack of liquidity in the NDF market, and a skew in positioning, and as such a reminder that the tail will not wag the dog in terms of PBoC rate policy, and therefore noisy Anglo Saxon market over reaction needs to be treated with care. To be sure China will tighten policy sometime in the first half of the year, but the move is not as imminent as NDF markets suggest.
Today’s move might be an over-reaction then, but it’s still indicative, perhaps, of the type of reaction we might expect when central banks around the world really do start withdrawing their unconventional support operations.
Related links:
Increase in China’s rates hits Nikkei – FT
The soap opera of China’s housing boom – FT