The author is Nomura economist Zhiwei Zhang
The People’s Bank of China (PBoC) resumed its reverse repo operations this week: injecting RMB13 billion and RMB16 billion, respectively, this Tuesday and Thursday, although the interest rates that it offered rose.
The 7-day repo rate remains elevated, hovering slightly above 5.0%, compared to 3.5% before liquidity tightening measures were taken.
We maintain our view that monetary policy has tightened (this has been a theme of late). The PBoC resumed liquidity injections but deliberately kept money market rates high, a clear signal to us that policy has tightened.
We believe the government will continue to keep liquidity tight. We expect new bank loans to fall to a range of RMB600-650 billion a month in the fourth quarter, from RMB787 billion in September, and total social financing to drop to RMB1.0-1.2 trillion a month from RMB1.4 trillion in September.
The pace of monetary policy tightening depends on how fast inflation rises in the coming months. We expect CPI inflation to rise to 3.5% in October from 3.1% in September and 2.6% in August.
(The article has been edited for clarity)