Stocks across China dropped after the central bank tightened financial conditions and an official raised concerns that loose liquidity could inflate an asset bubble.
The People’s Bank of China early on Tuesday withdrew Rmb78bn ($12bn) of net liquidity through its open market operations, a process through which the central bank and banking system lend to one another. The overnight repo rate, an interbank benchmark, jumped to more than 2.8 per cent — its highest level since late 2019 — from 2.5 per cent the previous day.
In Hong Kong, the Hang Seng index — which has been boosted this month by record-breaking daily volumes of buying by mainland investors — fell by more than 2.4 per cent. Mainland China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks dropped 2 per cent.
Investors have been closely scrutinising the PBoC’s policy approach against the backdrop of a rapid economic recovery from the coronavirus and rising asset prices. The CSI 300 this month hit its highest level since the global financial crisis.
That has put the PBoC under pressure to tighten financial conditions after loosening them in mid-2020 due to the impact of Covid-19, but it is grappling with low or negative levels of inflation despite economic growth exceeding its pre-coronavirus level.
Local media reports on Tuesday cited comments from Ma Jun, an adviser to the People’s Bank of China, telling a wealth management forum that the risk of asset bubbles would increase if the central bank did not adjust its policy.
“Whether this situation will intensify in the future depends on whether monetary policy is appropriately changed this year,” he said. He added that if not, such problems would “certainly continue” and lead to “greater economic and financial risks in the medium- and long-term”.
In late 2020, PBoC restrictions on short-term liquidity led to a spike in interbank borrowing costs. The three-month Shanghai interbank benchmark more than doubled between May and November to more than 3 per cent — its highest level in two years — before it gradually declined.
Chinese regulators have already moved to constrain rising property prices. They limited the amount banks can lend to the sector at the end of last year and are targeting leverage among the country’s vast developers. Individual cities have also introduced measures to curb prices.
Nearly $34bn has flowed from the mainland into Hong Kong’s stock market so far in 2021, according to Bloomberg data. Technology stocks such as Tencent and Meituan have rocketed, with the former adding 28 per cent since New Year.
“The mood is still totally remaining intact in terms of its positivity,” said Andy Maynard, managing director at China Renaissance Securities. “Although we have a blip today . . . yesterday was kind of euphoric, last week was kind of euphoric.”
But, he added, rising borrowing costs were unlikely to undermine positive momentum in China and other emerging markets.
“Where else in the world do you go? Where do you put that money?” he said. “For the global asset allocators who stay in equity, I don’t think you necessarily rush back to the dollar and you definitely are not touching Europe”.
Additional reporting by Wang Xueqiao in Shanghai