(Bloomberg) — A chill swept through Chinese financial markets after the central bank withdrew cash from the banking system and an official warned about asset bubbles.
The People’s Bank of China drained about $12 billion via open-market operations on Tuesday. The decision was unusual in the weeks before the Lunar New Year holiday, which in 2021 falls in mid-February, because residents typically need more cash to pay for seasonal travel and gifts. It also went against recent reports in Chinese newspapers that liquidity wouldn’t be tightened before the holidays.
While Tuesday’s withdrawal was small in isolation, it added to signs that Beijing is growing wary of how cheap and plentiful liquidity has stoked excess in markets. PBOC adviser Ma Jun told local media that risks of asset bubbles — such as in the stock or property market — will remain if China doesn’t shift its focus toward job growth and inflation management instead.
Read: Pandemic-Era Central Banking Is Creating Bubbles Everywhere
The reaction was particularly brutal in Hong Kong’s stock market, where onshore funds were helping underpin a world-beating rally. Mainland investors bought a net HK$250 billion ($32 billion) worth of Hong Kong stocks this year through Monday, almost 40% of last year’s total, and were buyers again on Tuesday. The Hang Seng Index fell 2.6% from its highest level since June 2018, led by a 7.2% drop in Hong Kong Exchanges & Clearing Ltd. and a 6.3% plunge in Tencent Holdings Ltd.
In mainland markets, a gauge of interbank borrowing costs jumped 36 basis points to 2.78% on Tuesday, the highest level in a year. Futures on Chinese government bonds due in a decade were poised for the biggest decline since September, while the CSI 300 Index of shares in Shanghai and Shenzhen, which has been approaching 2007’s record high, fell 2%.
“The PBOC wants to bring investors out of the euphoria caused by abundant liquidity in December,” says Xing Zhaopeng, an economist at Australia & New Zealand Banking Group. “The PBOC is unlikely to loosen its purse strings at least this week, which will make cross-month liquidity very tight.”
PBOC Governor Yi Gang on Monday said the central bank will seek to support economic growth while limiting risks to the financial system — a continuation of its existing policy stance. Yi said China’s total debt-to-output ratio climbed to around 280% at the end of last year.
Tencent’s drop came after the stock surged 11% on Monday, its best day since 2011, to approach a trillion-dollar market value. With more than a billion people using its WeChat social-media platform, Tencent is ubiquitous to Chinese investors who have no access to Hong Kong shares of rival Alibaba Group Holding Ltd. through the trading links.
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