China Policy Adds Liquidity, But....

08/02/2013 10:00 am EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

The People's Bank of China added funds to the banking system at the end of July, but as Moneyshow's Jim Jubak explains, this may actually be a shift in policy.

On July 30, the People’s Bank of China added money to the banking system really for the first time since February.  It did it through something called reverse repos that basically puts money back into the bank, but it was only about two or three billion dollars.  The reaction to this by the Chinese market was oh really good that they’re not trying to create a credit crunch again, so the Shanghai index went up on the news, but only by about two-tenths, three-tenths of a percentage point, because this wasn’t really much.

This was not a return to the good old days of people’s bank putting money into the system as soon as growth slowed, so the markets are saying oh, okay, it’s good that we’re not seeing a credit crunch, but it’s not that good because we’re seeing signs that the government is serious about letting growth slow below 7.5%, maybe down to 7% in order to get some of the excess out of the financial system and that the bank is simply not going to use lots and lots of money flowing from the central bank into the monetary system to paper over problems, and there are lots of problems in the Chinese economy right now.  You’ve got companies that should be going bankrupt; you’ve got excess capacity that the Chinese government wants to ring out of the economy.  The ministry of trade said there are 1400 companies that should be cutting capacity over the next year.

Whether they will or not, another issue, but the fact that the government is saying this indicates that at least for some companies is going to be tight times in terms of getting capital.  How tight, no one knows.  It’s why when the people’s bank moves to inject a little capital and the market goes, shoo, we’re glad it’s not worse than that, but the markets not looking at this and saying really, really good news and moving up strongly. 

This is Jim Jubak for the MoneyShow.com Video Network

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