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Forex Flash: PBoC actions spook the market sparking a 3% drop in the Shanghai Composite - BBH

Brown Brothers Harriman analysts note that actions by the PBoC have spooked the market and instigated a 3 point drop in the Shanghai Composite.

They note that it drained CNY 910bln from the money market, well more than expected and a little bit larger than what would have been achieved by a 25 bp hike in required reserves. It drained via a long-term repo operation, something not seen since last June and some observers see this as a tightening of policy and the financials were among the weakest performers. However, they write, “we suspect the PBOC is being vigilant and draining the excess liquidity in the aftermath of the Lunar New Year holiday and evidence that sales were softer than usual.”

Separately, they feel that efforts to curb housing loans and limit price increases though the local governments have been extended. The fact that the government is using specific action targeted to the housing market supports our contention that the blunter tool of monetary policy is not being tightened despite the drain in liquidity.

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