China to maintain monetary policies, arbitrage is controllable

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Bank loans increased by 3.23 trillion yuan （0.48 trillion U.S. dollars）in January, credit numbers announced last week by the People's Bank of China (PBOC) showed. At the same time, total social financing rose 4.64 trillion yuan (0.69 trillion U.S. dollars). Chinese Premier Li Keqiang said China will continue with the prudent monetary policies during a plenary meeting of the State Council on Wednesday.

The PBOC launched a swap program to transform 1.5 billion yuan (0.22 trillion U.S. dollars) in perpetual bonds into central bank bills on Thursday. The move aims to support recapitalization for commercial banks and cushion risks.

The increased funding came mainly on short-term loans and bill financing that could lead to "arbitrage" where a company could take advantage of differentials between higher deposit rates compared to lower bill financing rates.

Chen Jiahe, Chief Strategist from Cinda Securities, said it is not the worst case.

“The worst case is arbitrage between short term funds and speculation in the capital market. If the money goes to speculate in the capital market like what we have seen in 2014 and 2015 in the stock market, that will be horrible,” he said.

Chen noted thanks to the authorities having noted the risk and made it controllable. “I have always said the biggest risk is you don't know where the risk is,” he added.

At Wednesday's State Council executive meeting, Chinese Premier Li Keqiang noted that the policymakers should take targeted measures and divert more funding to the real economy and to small-and-medium-sized firms.