A need to sterilise the resumption of capital inflows could be the motivation behind the PBOC allowing one- and two-week repo rates in China to move to their highest levels since June. But this could prove to be a more meaningful policy signal of a change in the liquidity environment ahead of the Third Plenum next month.
It remains unlikely that the PBOC wants to see a repeat of the money market disruptions in June, when its motivation was more punitive but this has not stopped the slow move higher. In any case, it can turn the liquidity taps on and resume liquidity injection operations if it feels that money market rates have moved too far.
When coupled with the near 20-year high on the CNY, the PBOC move could simply be a controlled tightening of the liquidity environment. The reason this time could be a desire to reorient policy. China’s growth model is seen as being under stress and dealing with rapid credit growth is at the heart of the challenge in balancing the need for reform, development and stability.
What we are seeing is not so much a repeat of the heavy-handed approach of June but a modified and morphed strategy to deal with excessive credit growth. Tighter liquidity conditions are likely to persist; especially if Chinese policy makers show a tolerance for a slower growth target of 7% next year compared with 7.5% for 2013.