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The People's Bank of China finally provided liquidity relief to the country's banking system along with a "Okay, we'll give it to you, but this is the last time"–type warning familiar to parents worldwide. China's credit system remains highly stressed, however, and a change in tone from the government – suggesting fighting corruption, not stoking economic growth, will be the focus for the foreseeable future – is only making things more complicated.
Maddeningly, the PBoC didn't make any official statements overnight, but according to Reuters, "rumours that some major banks [needed] emergency funding were quelled. There was also market talk the central bank had guided the biggest state lenders to provide more short-term funds to smaller banks."
This is the way economic policy often works in China: when stress occurs, the federal government orders the banks to open the lending taps whether it makes sense in the long-term, or not.
In the end, there was a distinct but limited easing in credit tensions. The seven-day repo rate (repurchase agreements, one of the primary ways banks raise short term money), which had spiked to 25 per cent annualized on Thursday, dropped to 5.5 per cent. But while seven-day rates fell sharply, 14-day repo rates remain at 9.5 per cent, triple the level of mid-May.
The FT's brilliant Kate Mackenzie explained how an apparent change in Chinese federal government policy is complicating the outlook for both the country's banks and the economy. The central bank has been ordered to squash "the four winds of formalism, bureaucracy, hedonism and extravagance" as part of a full-on government assault on corruption.
UBS economist Tao Wang goes a step further, suggesting the recent reluctance of the PBoC to provide liquidity to the banking system signals "the central government's increased tolerance for slower growth and increased attention to financial risks."
All signs point to a sharp slowing in the Chinese economy. The Chinese government appears to be switching priorities away from the highly pro-stimulus policies implemented during the financial crisis – it is no longer valuing economic expansion at any cost.
For Canadian investors in China-sensitive investments, particularly mining, the change in emphasis comes at a highly inconvenient time. Production capacity has expanded just as the main source of demand is slowing. The outlook for the mining sector continues to darken and investors should reduce holdings on any market strength.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights , and follow Scott on Twitter at @SBarlow_ROB .
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Scott Barlow