| BEIJING, June 23
BEIJING, June 23 China's central bank rarely
explains its actions in public and keeps markets guessing on
policy, but the angst created by its stand off with banks in the
money markets is prompting calls for it to change tack.
The People's Bank of China (PBOC) let short-term interest
rates spike to extraordinary levels this past week as it refused
to inject funds into money markets.
Some observers saw it as an attempt to force banks to stop
channelling money into the informal banking sector, known as
"shadow banking", which authorities worry is creating
significant credit risks.
For years, the central bank has made stability its
watchword, which for the money markets meant it would always
provide liquidity when cash conditions tightened. As the central
bank is now standing back while banks scramble for cash, markets
are left uncertain as to whether there has been a fundamental
change in policy.
In effect, there seems to be a competing policy objective,
said Fitch Ratings Senior Director Charlene Chu.
"The real uncertainty in the market comes down to people not
really knowing which of those is more important at which point
in time," she said on the sidelines of a conference in Sydney.
Traders blame the absence of a clear and public signal from
the central bank for panic at some smaller banks, as the cost of
borrowing overnight funds spiked to as high as 25 percent for
Those jitters spread more broadly late last week, as rumours
- passed on by Chinese media outlets - that two major banks had
received emergency funds from the PBOC circulated in financial
markets in London and New York on Thursday.
The lenders denied the rumours, after which money markets
calmed somewhat on Friday.
The panic in the otherwise arcane marketplace even sparked a
flurry of activity on social media as the Twitter-like service
Weibo lit up with comments from Chinese worried that a financial
crisis was unfolding.
Throughout, the central bank has remained silent. Several
telephone calls from Reuters to the PBOC for comment went
To many market players, the episode highlights that it is
time for the PBOC to shift away from its penchant for opacity in
conducting its business. In the past that has included carrying
out special market operations behind the scenes and announcing
changes in policy interest rates out of the blue and with a
minimum of explanation - often at odd hours of the day and at
"There should be a lesson to be drawn from this," said Zhao
Qingming, an economist at China Construction Bank.
The information asymmetry between the central bank and
market participants led to confusion and exacerbated the cash
crunch, traders said. Some banks dared not lend out money to
other banks even though they had cash at hand due to the
uncertainty, Zhao said.
"I think the central bank should improve its communication
with the market. At least, it should tell the market clearly
what its intention is at the very beginning," he said.
Several money market traders reached by Reuters also
expressed a similar wish for greater clarity from the PBOC.
Unlike the central banks of most major economies, such as
the U.S. Federal Reserve or the European Central Bank, the PBOC
does not hold regular interest rate-setting meetings or release
detailed minutes of meetings.
The heads of the Fed and the ECB hold question and answer
sessions with the media immediately following their policy
meetings to further explain the thinking behind decisions and to
try to avoid the potential for markets misreading their
However, unlike many central banks of other leading
economies, the PBOC is not independent of the government. Major
decisions on policy need the approval of the cabinet.
Banking sources told Reuters on Friday that the PBOC did
hold a meeting earlier in the week in which it told senior
bankers not to expect liquidity to be as plentiful as it had
been and that they would have to manage their own affairs
better. But that message did not necessarily make it to the
trading floor, at least not by Friday.
"We don't know what the central bank thinks. Maybe some
senior officials of our bank know, but we are trading blind,"
said a trader at a state-owned bank, who declined to be
identified in the absence of authorisation to speak to the
Fitch Ratings said in a statement on Friday that the PBOC's
efforts to constrain the cash available to banks for "shadow
banking" activities could be more effective than the other steps
it has taken in the past.
But it also raised the potential for "a policy misstep
and/or unintended consequences", it said.
Fitch did not single out the PBOC's communication strategy,
but a flurry of worried comments on Weibo suggested the central
bank might need to think not only about the response of the
market, but to the public more broadly.
"The central bank's open market operations are so opaque and
the entire banking system is not transparent! Nobody knows what
is going on, which has been the major reason behind the market
panic," said one Weibo user.