My very smart young assistant Shang Ning (a PKU junior), sent me the following note early this morning:
"Right after the market closed yesterday, PBoC announced a new issue of Central Bank Notes on Aug 9th (today). The total sum is 57 Billion RMB ($7.5B). It is a much larger sum than in July, and since entering into August, the sum significantly increased. This is taken as a kind of worry on over-liquidity and overheating of economy since CPI of first half has been reported. The 57B central bank notes will be divided into two groups: 22 B with maturity of 3 years and 35B with a maturity of 9 months. The maturity is also larger than central bank notes inssued in July. Expectation of maturing notes in this week is 58 B, and in the end of July, it was 32B."
The market, which had been rising all yesterday morning, suddenly went into a swoon late in the day and there was no real news to explain it. It annoys me no end that after the market closed this news, about what seems to be a larger-than-expected tightening, came out, but of course it doesn't surprise me.
I haven't been able to find confirmation in today's foreign press, but if true I think it makes sense to extend maturies in this way (although the total issue size doesn't seem that big compared to maturing bills). I have always been very skeptical about the usefulness of a sterilization process that exchanges money for an almost-perfect substitute -- very short-term and extremely liquid central bank bills -- and so I would prefer that the PBoC extend maturities and reduce the liquidity of these bills as much as possible.
This will allow them to do a better job of soaking up some of the tremendous liqudity flooding the system. It does probably increase the cost of sterilization, and with dollar assets declining relative to the PBoC's yuan obligations, cost is probably an important issue, but if it does a better job of reducing liqudity in the system, so be it.
Hey Mike, great site. My question is related to PBOC issuances of "punishment" tranches to banks that pay lower than market yield. I am not sure if banks are required to hold these during a lock-in period. But suppose they can trade them in the interbank market, what effect would that have on the interbank market. I ask because I think it will become increasingly common in the second half.
Iwould say that it depends on the maturity and liquidity (and of course outstanding amount) of these bonds. The fact that they have low coupons is irrelevant because the banks can simply sell them at a lower price to raise the implicit yield -- if they are willing to recognize the loss, of course. I suspect they won't sell them because they won't want to book the loss, but I don't really know.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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Comments (2) for "PBoC extends maturities"
- 8/9/2007 1:31 AM
December, 2007