What has PBOC done so far?
According to Fitch Ratings, the recent tightening in liquidity was sparked by a drop in foreign-exchange inflows and seasonal tightness associated with the mid-June holiday; quarter-end prudential requirements; and fiscal deposit submissions.
But it has intensified, as the People's Bank of China (PBOC) has largely refrained from intervening.
State banks are the primary beneficiaries of foreign-exchange inflows, and the drop in these flows is a key reason why recent tightness is being felt even among the largest lenders in the country.
Here's more from Fitch Ratings:
The Chinese authorities have the ability to address the liquidity pressures, but their hands-off response to date reflects in part a new strategy to rein in the growth of shadow finance by constraining the liquidity available to fund new credit extension. We expect this approach to be more effective and swift in slowing shadow activity than previous efforts, which have focused predominantly on rules and regulation. But such an approach also increases repayment risk among banks, and raises the potential for a policy mis-step and/or unintended consequences.
Should authorities retain this policy stance, we would expect broad credit growth to decelerate more noticeably for the rest of 2013, following an unprecedentedly active Q113. We project our measure of broad credit - Fitch-adjusted total societal financing, which builds from the PBOC's total societal financing metric - to remain on a par with 2011-2012, at more than CNY18trn. But there is significant scope for the reality to be below forecast - should tight liquidity conditions persist or worsen into H213.
The CNY18trn figure may appear high, although an estimated CNY10trn in new credit had already been extended by end-May, leaving just over CNY1.1trn in average new credit per month for the rest of the year (January-May: CNY2trn per month). This credit deceleration will create a further drag on economic growth, which has been slowing down steadily since early 2010.
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