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As Markets Seesaw, China’s Central Bank Tries to Allay Concern on Tight Credit

HONG KONG — The Chinese central bank reassured investors worried about a lingering credit squeeze and declared that it had already been selectively supporting bank liquidity, as Chinese stock markets swung wildly again Tuesday after several days of volatility.

The central bank, People’s Bank of China, eager to rein in soaring lending growth and financial risk, initially refrained from intervening as bank-to-bank interest rates soared last week, but then apparently released more money for lenders. Uncertainty over the central bank’s position produced wide trading swings Tuesday, with the main Chinese stock indexes dropping to their lowest levels since early 2009 before recovering most of the day’s losses near the end of trading.

The Shanghai composite index, which tumbled 5.3 percent Monday, slumped more than 5 percent again by early afternoon Tuesday. It recovered almost all of those losses to close down 0.2 percent. The index’s total decline since a peak in early February has been nearly 20 percent.

After China’s stock markets closed, the People’s Bank of China issued a statement apparently meant to soothe investors’ nerves and maintain pressure on banks deemed to be carrying too much risk.

“In recent days, the central bank has provided liquidity support to some financial institutions that meet the demands of macro prudence,” the bank said on its Web site. “Some banks with ample liquidity have also begun to play a stabilizing role in circulating capital into markets.”

On Tuesday the bank pledged that it would apply open market operations — buying or selling securities to manage liquidity and rates — and other methods to offset “short-term abnormal volatility, stabilize market expectations and maintain stability in monetary markets.”

The reassurances were accompanied by a warning to commercial banks to contain risk and to report promptly any “sudden major problems.” Chinese banks that follow government policies in lending practices and risk controls can expect support from the central bank if they have brief capital shortfalls, the bank said. But wayward banks can expect tougher treatment, it suggested.

“For institutions that have problems in their liquidity management, corresponding measures will be taken on a case-by-case basis, while maintaining the overall stability of money markets,” it said.

“The stock markets are continuing to react to the very elevated funding costs,” said Dariusz Kowalczyk, a senior economist and strategist at Crédit Agricole in Hong Kong, referring to the recent surge in interbank lending rates. Those rates determine what banks pay to borrow from each other, often to cover short-term obligations.

Interbank lending rates, which began to decline last Friday, continued to do so Tuesday. The benchmark overnight lending rate, a gauge of liquidity in the financial market, stood at 5.736 percent. That was down from 6.489 percent on Monday and well below the record high of 13.44 percent reached last Thursday.

But with rates still well above where they were in the last 18 months, around 3 percent, anxiety over the effect on the financial system and the economy persisted Tuesday.

The central bank’s stance could help economic conditions in China, many analysts have said, by instilling more lending discipline and reducing the chances of asset price bubbles and loan defaults that have increased with rapid lending growth in the last few months.

In its latest statement Tuesday, the central bank urged commercial banks to “prudently control the excessively rapid expansion of credit and assets that may lead to liquidity risks.”

Still, many analysts contend that the central bank’s tough stance has risks.

“We believe the biggest risk comes from the P.B.O.C. potentially mishandling the situation,” Ting Lu, China economist at Bank of America Merrill Lynch, said Tuesday, referring to the People’s Bank of China. “That being said, we believe the P.B.O.C. and Chinese policy makers will be aware of the potential dangers and take decisive measures to revive the interbank market, to calm investors and to stabilize the economy.”

In the rest of the Asia-Pacific region, the prospect of slower economic growth in China has weighed on markets for months.

Article source: http://www.nytimes.com/2013/06/26/business/global/china-stocks-tumble-for-second-straight-day.html?partner=rss&emc=rss

As Stimulus Nears End, Fed Signals Focus on Rates

The minutes, closely watched for any signs of change in Federal Reserve monetary policy, were released as the central bank was nearing the close of its program to buy $600 billion in Treasury securities by the end of June — its main effort to pump money into the economy as a stimulus.

Economists and the financial markets will be parsing the language of the central bank and its officials in the coming weeks for signs of what the central bank might do when that program ends.

The minutes made clear that the Fed committee had made no decision on its next move but was debating its options. They said that the committee was continuing to reinvest principal payments from securities holdings and that it would finish its program, announced late last year, of buying the Treasury securities. The bank will also maintain the federal funds rate of zero to one-quarter percent.

The minutes said there were no dissents among the 10 policy makers involved in the decision.

Still, the range of views presented in the April minutes emphasized the debate that is taking place as the bank nears the end of its stimulus program, also known as quantitative easing. This debate will only become sharper over the next month; the committee meets again June 21-22.

Most of the policy makers favored raising the federal funds rate before selling securities, giving the central bank the option to adjust it if needed should there be weaker economic growth. A “few” participants preferred that sales and increases in the rate should take place at the same time, and a few preferred that sales begin before any increases. The minutes also said that almost all the members of the committee believed that reinvestments from securities should be stopped as the first step. Most said the timing of asset sales should be announced, with several members saying they could vary with the economic outlook.

“Most participants saw changes in the target for the federal funds rate as the preferred active tool for tightening monetary policy when appropriate,” the minutes said.

Joshua Shapiro, chief United States economist at the research firm MFR, said the minutes put a “finer focus” on the Fed’s strategy for exiting the program.

“That was in the minutes for the first time in terms of nuts and bolts,” he said. “It was the first time that we really got something down on paper that seems to be a road map in terms of what they are talking about.”

Gregory Daco, a senior economist with IHS Global Insight, said he believed that the committee would let the bank balance sheets shrink toward the end of 2011, and start moving rates back up in early 2012.

There seemed to be overall agreement on what steps were needed, but not the sequence, in the minutes. “They have studied the options,” Mr. Daco said. “Agreeing on a strategy not to reinvest payments of principal on securities would reduce the balance sheet. That would be in itself a first tightening of monetary policy.”

Stock prices on Wall Street rose after the release of the minutes.

The Federal Reserve chairman, Ben S. Bernanke, held a news conference immediately after the April meeting, the first such event by any Fed chairman.

Mr. Bernanke, speaking last month, had said that there would be no changes in short-term rates for several meetings. The committee meets eight times each year.

Energy and food prices rose in the first quarter, the minutes noted, with a small uptick in core price inflation, and the government’s official unemployment rate, which reflects the share of the labor force actively seeking jobs, rose to 9 percent in April from 8.8 percent in March.

The committee projected that the unemployment rate would decline gradually, while revising up their inflation projections, even though they said higher inflation would be “transitory.”

Over all, conditions pointed to a “moderate economic recovery,” despite unexpectedly slowing growth in the first quarter.

Article source: http://feeds.nytimes.com/click.phdo?i=6ba4fc39ed89cf2ab902a17d2e55aa89

As Markets Seesaw, China’s Central Bank Tries to Allay Concern on Tight Credit

As Stimulus Nears End, Fed Signals Focus on Rates

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