Money Market Quietly Increases Interest Rates To Curb Asset Bubbles And China's Monetary Policy Tightens.

The Central Bank of China has announced the framework of monetary policy, which will gradually shift from quantitative targets to price targets.

This means that the money market interest rate represented by the 7 day repurchase may gradually replace the benchmark interest rate of deposit and loan and become a new wind vane of China's monetary policy.

In recent surveys, the majority of economists interviewed argue that China will mainly guide the market through the interest rate corridor with a 7 day repo rate as the central interest rate in the future.

As China's GDP growth has stabilized 6.7% in 3 consecutive quarters, PMI has hit a new high since July 2014. The pressure of RMB depreciation has increased before the US interest rate window. The centre of gravity of monetary policy is undergoing subtle changes: the rise in short-term interest rates will help to curb the speculative growth of silver banks and provide support for the exchange rate of the people.

The Central Bank of China did not reply to a fax seeking comment from Bloomberg on Wednesday.

According to the trend of the 7 day interest rate in the near future, it is clear that there are seasonal factors in the first two weeks of the capital market. The repo rate has been down for 7 days in the past two days, but on Wednesday, the central bank's open market operation has been pferred from net to net return, indicating that the central bank still does not want to have too much liquidity.

On Wednesday, the 7 day repo weighted interest rate closed at 2.37%, which has surged to 2.72% in October 27th.

Clearly, the central bank's open market reverse repurchase rate of 2.25% operating rate is the actual lower limit of the current interest rate corridor.

Earlier, Ma Jun, chief economist of the central bank's Research Bureau, proposed in his work paper that the upper and lower limit of the central bank's short-term interest rate stability is SLF.

And the excess deposit reserve interest rate, which is currently only 0.72%.

Ming Ming said that the central bank through the marketization of price control, to rectify the overestimation of asset prices, "the market's excessive pursuit of capital gains needs to return to reason."

China's benchmark interest rate, one-year bank deposit and loan interest rate, has not been adjusted for more than a year.

This does not mean that the Central Bank of China has nothing to do with monetary policy loosening and tightening: since late August, the central bank has resumed 14 days and 28 days of reverse repurchase, pushing up the cost of money in the money market: in October, the 7 day repurchase weighted interest rate rose to more than a year and a half high in August, up from nearly 23 basis points in August.

Last Friday, the Politburo of the CPC Central Committee held a meeting that monetary policy should focus on restraining asset bubbles and guarding against economic and financial risks while maintaining a reasonable and abundant liquidity, and rarely mentioned "steady growth" at the same time.

"The central bank has begun to tighten its options," said Yang Yuting, chief economist of the Greater China region in Hongkong, Australia. "The central bank does not want to adjust the benchmark interest rate to affect the overall cost of capital, but selectively tighten it to prevent bubbles, such as in the excessive liquidity of the money market and bond market."

He said in his report this week that growth is no longer a problem. The government will focus more on capacity and leverage.

"There is pressure from both exchange rates and deleveraging," said CITIC Securities's Fixed Income Research Director, speaking of recent changes in monetary policy.

On the one hand, the RMB exchange rate has some pressure in the future. On the other hand, under the background of deleveraging,

Obviously, it can't be too loose.

"The central bank's attitude is very clear, since August, when the long end interest rate has a clear downward trend, the central bank will push it back."

Despite the slowdown in the real economy, China's money supply still has a two digit percentage increase.

At the end of the three quarter of this year, the ratio of China's broad currency (M2) to GDP has reached a historical high of 210%, and the leverage level has not risen.

In early September, Yi Gang, vice president of the people's Bank of China, said in Hangzhou that China's overall leverage ratio was relatively high.

A year's increase of 9 percentage points is too fast. In the short term, steady leverage will bring down this speed.

Obviously, the central bank can not directly control asset prices, but the central bank's most important tool is the yield curve.

The horizontal curve will lead to the fact that the capital is not solid enough to cause the asset bubble.

By pushing up the money market interest rate at the short end of the curve, the profit margin will be narrowed by adding leverage to long term bond assets.

He also said that the central bank's consideration of off balance sheet financing will be incorporated into the MPA generalized credit assessment, which also reflects the demand for deleveraging.

The interbank market pledged repurchase scale in October was 38 trillion yuan, down 36% from the historical high of nearly 60 trillion yuan in August.

Shen Jianguang, chief economist of Mizuho Securities Asia, said that China will rely more on new short-term liquidity tools to guide long-term interest rates in the future, because these funds will lead to a greater probability of entering the real economy and supporting growth.

He also predicted that the PBOC would not raise the benchmark interest rate because "credit is too strong".

Obviously, the change of monetary policy is not a big direction, but a combination of tools.

He said: "it will be steady and neutral, and at the same time enhance the flexibility of tools.

We must reduce the leverage of the whole market and guide the capital flow to the real economy.

This year, at the end of the two months, foreign exchange funds continue to decline, and the possibility of the central bank getting the money down is very low.