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Jul 30, 2013, 08.54 AM IST | Source: Reuters

China central bank injects funds, eases cash crunch fears

Market participants and investors in adjacent markets have been keeping a close eye on China's interbank money market after the central bank allowed a credit crunch to occur in late June as a warning against risky lending practices.

China central bank injects funds, eases cash crunch fears

China's central bank injected funds into money markets via open market operations on Tuesday for the first time since February, easing fears of another cash crunch ahead of the month end after a severe cash squeeze in June caused market panic.

Market participants and investors in adjacent markets have been keeping a close eye on China's interbank money market after the central bank allowed a credit crunch to occur in late June as a warning against risky lending practices.

Short-term money rates in China have been rising steadily in recent weeks as the end of July approached and Chinese companies and banks stocked up on cash to make dividend payments and get books in order.

Some economists had predicted the People's Bank of China (PBOC) would take advantage of the pressure to engineer another end-month credit crunch if China's financial sector did not show signs of reining in risky lending.

The central bank has never explained its reasoning for allowing rates to spike in June, and it kept traders guessing in July, letting maturing instruments inject fresh funds passively but otherwise taking no direct action.

That changed on Tuesday.

The injection, a 17 billion yuanissuance of seven-day reverse bond repurchase agreements, marked the first time the central bank had engaged in open market operations since June 20 and the first time it had issued reverse repos, which inject funds instead of draining them, since early February.

Stock markets rose on the news. The Shanghai Financials Index opened up 0.5 percent with China Merchants Bank starting up 0.9 percent and China Minsheng Bank up 0.3 percent in Shanghai. They were outperforming the broader market.

However, the central bank set the seven-day reverse repo rate at 4.4 percent, much higher than the last official guidance rate of 3.35 percent, setting a relatively high floor for the market rates the contract can trade at.

A dealer at a state-owned bank in Beijing said that the amount injected was small, and yet the official guidance rate was high, implying the central bank wants to ensure the market is sufficiently liquid but that cash is relatively expensive.

"The (high rate) could also serve as a signal that the era of ultra loose and easy money is over and liquidity has to be appropriately priced," wrote Wee-Khoon Chong, economist at Societe Generale in Hong Kong, in a research note to clients.

Even so, money rates showed signs of easing, with the volume-weighted seven day repo contract opening down slightly. Interest rates for 1 day repos and 14-day repos also fell.

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