China Removes 48.5 Billion RMB from Markets to Control Lending

The People’s Bank of China (PBOC) has decided to repurchase, and thus remove, 48.5 Billion RMB from its money markets in an effort to control excessive lending from banks. This is the first time they have done this since June of last year (when the figure was a far lesser 10 billion), and the largest retracting of its kind in nearly two years.

The move comes after money-market rates sank to the lowest levels in at least three months and the seven-day purchase rate, which shows how much funds are available in the banking system, fell sharply.

The period after Chinese New Year traditionally sees a rapid jump in lending. The PBOC has made efforts previously to retract excess currency to prevent it from being lent in an informal, unregulated, and possibly unsafe manners –called ‘shadow banking’.

E-Commerce companies are not likely the ones causing these fluctuations in the market. Rather, local municipalities and construction businesses have accrued huge debts to keep their infrastructure and construction projects afloat.

For anyone living in China or following world news, the story of China’s constant building is nothing new. The numbers still seem staggering though: according the BBC, “over the past few years, China has built a new skyscraper every five days, more than 30 airports, metros in 25 cities, the three longest bridges in the world, more than 6,000 miles of high speed railway lines, 26,000 miles of motorway.”

Source: Financial Times

But if these projects are financed by shadow banking that could mean debts might turn “sour”, according to another BBC report.

The Chinese banks know they will be protected from situations like this, at risk of a financial collapse, so they are motivated to loan whenever possible. This is the government’s solution to curb excessive loaning that is motivated by the situation banks find themselves in.

The PBOC, on its behalf, had this to say: “When the valve of liquidity starts to tame and curb excessive credit expansion, money-market rates, or the cost of liquidity, will reflect that.”

In other words, ‘we’ll give you [the money markets] back this money when you actually need it’.