The View | What’s driving the mysterious gains in Chinese banking shares?

The professional who follows financial markets in China requires an unusual toolkit. Besides econometric knowledge, he or she has to act as a detective, gossip-monger, pop-psychologist and conspiracy theorist.

Just look at the difference between monetary outlooks on the Federal Reserve versus the People’s Bank of China. The Fed watcher’s report will heavily rely on Taylor rules and regression models. It cannot forecast surprises, because the Fed telegraphs its intentions with the same level of earnest detail that a random American, seated next to you on a plane, might provide about his political views, or marriage, or the items in his breakfast sandwich.

In China, however, surprises occur all the time. Two weeks ago, for instance, there was an unexpected liquidity squeeze in the interbank market, forcing market watchers into Freudian analysis mode. The PBOC is clearly mad about something – but what? It’s like trying to figure out why an uncommunicative spouse has gone frosty. The trick is to review all recent sins, and through a process of deduction identify the likely target of the PBOC’s ire.

Could it be loose lending in the mortgage market? A surge of wealth management product (WMP) sales in the shadow banking market? Or is the PBOC taking revenge on those who may be gaming the bond market, piling into risky high-yield debt on the assumption that governments will bail out, rather than allow defaults ahead of upcoming National People’s Congress?

One can only speculate. In writing about the squeeze, BOC International used the word “rumour” five times in its report. For example in this sentence: “The unclear signal from the central bank without communication to the market caused rumours and then significant increase in interest rates in the market.”

Rates calmed when vice governor Yi Gang reassured the markets that liquidity would remain ample. But really, can Yi be trusted?

Strategists at both Bank of America Merrill Lynch and Credit Suisse expect further tightening ahead. Merrill’s chief concern is the bubbly sales in WMPs, or financial vehicles structured and managed by banks, that usually promise to deliver superior returns to bank deposits. A crackdown in this sector will likely have a broader tightening effect, in Merrill’s view. WMPs are the biggest funding sources in the shadow-banking world, and as such, “any significant slow-down in [their] sales may have important implications on asset prices across the board, especially bonds and stocks, and possibly properties.”