* China's yuan, money markets down after disappointing
* Weak data, low inflation may encourage Beijing to ease
* May mean PBOC is pausing campaign to reduce risky lending
By Pete Sweeney
SHANGHAI, March 10 Chinese short-term rates and
the yuan fell on Monday following surprisingly weak exports data
at the weekend, fuelling expectations Beijing is quietly easing
monetary policy to buttress wobbly economic growth.
China's exports tumbled 18.1 percent in February, when
analysts had expected a rise. The drop followed other signs that
China's industrial activity is beginning to slow down.
The benchmark money rate opened at 2.2 percent on Monday,
its lowest level since April 2008, while the yuan dropped around
0.5 percent against the dollar - under central bank guidance -
for its biggest one-day fall since 2008.
Some economists believe that by letting interest rates fall
and simultaneously forcing the yuan down, Beijing is conducting
a short-term two-pronged attack on speculators, who have been
pouring money into China to cash in on a rising yuan and high
yields on debt. Some have faked trade deals to sneak money into
China past strict capital controls.
Others argue that signs China's economic recovery may be
skidding has forced the People's Bank of China (PBOC) to embark
on a deeper, more sustained policy shift by boosting short-term
money supply to put growth back on track.
That could signal a pause in efforts to crack down on risky
shadow banking and forcing debt-sodden Chinese companies to
reduce their debt burden.
"The balance between growth and reform will soon be tested
and as a result, policy moves may favour cyclical easing over
structural reform," Shen Mingao, head of China research at
Citibank in Hong Kong, said in a research note.
Some economists have suggested the central bank may even go
further by cutting the amount of reserves that banks have to
keep on hand, which would cause a dramatic long-term rise in
base money supply.
Domestic equity indexes, where regulators have less direct
market influence, sagged around 1.5 percent, reacting to the
Some analysts argue that the attack against yuan speculators
helps explain the decline in exports. Regulators have been
engineering a steady decline in the currency in recent weeks.
"The incentive for fake exports disappeared and the
discrepancy may narrow further," Zhu Haibin, J.P. Morgan chief
China economist, wrote in a research note.
Still, economists caution that seasonal factors and
speculative flows have combined to distort many economic
indicators - in particular exports - making it risky to read too
much into the central bank's moves.
In the currency market, the central bank abruptly began
guiding the yuan down sharply in mid-February via its official
midpoint guidance rate, around which the exchange
rate is allowed to diverge by 1 percent.
The spot yuan dropped nearly 2 percent over the course of
nine trading days until the middle of last week. On Monday, the
PBOC pointed the currency sharply down again, setting the
midpoint at its weakest level since early December.
Traders say the PBOC's goal is to attack short-term
speculators who have erected massive long-yuan positions on the
assumption the yuan was a risk-free one-way bet following years
of steady appreciation. They say state-owned banks worked at the
central bank's behest, buying dollars and selling yuan.
Such intervention would be a de-facto monetary injection,
helping explain why short-term money rates have slid so abruptly
and stayed so low.
Money dealers were surprised in early March when the central
bank held back from aggressively mopping up extra liquidity left
over from cash injections made prior to the Chinese Lunar New
By leaving cash in the financial system, and at the same
time pushing down the exchange rate by injecting fresh yuan into
the interbank market, the PBOC effectively increased short-term
This has prompted the benchmark seven-day bond repurchase
average rate, considered the best indicator of
near-term liquidity conditions, to lose around 2 percentage
points since the holiday.
The looser conditions have also impacted bank lending rates,
with the discount rate for one-year bankers acceptance notes
, considered a rough proxy for bank loan rates,
sliding sharply since February 10 to 5.5382 percent.
A trader at a state-owned bank in Beijing argued that the
lower rates partly reflect successful attempts by regulators to
get banks to abandon their riskiest shadow banking activities,
leaving them with more cash on hand.
"Major banks have abundant money now after steadily
deleveraging themselves since last June, which is thanks to
better risk management," the trader said.
Market sources said signs that China's inflation is easing
also gives the central bank more room to ease policy without
aggravating asset bubbles in socially sensitive sectors like
"This provides enough room for PBOC to strike a delicate
balance between stabilising growth and mitigating financial
risks," Qu Hongbin, chief Greater China economist at HSBC in
Hong Kong, wrote in a note on March 5.
Underlining the trend, consumer inflation dropped to a
13-month low of 2 percent in February, data showed on Sunday,
well below the government's 2014 target of 3.5 percent. Producer
prices have been falling for two years, the data showed.