PBoC’s US$14bil fund injection eases cash crunch fears (update)

by **Cals** Tue 24 Sep 2013, 15:08

Published: Tuesday September 24, 2013 MYT 2:12:00 PM
Updated: Tuesday September 24, 2013 MYT 2:22:21 PM
PBoC’s US$14bil fund injection eases cash crunch fears (update)

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SHANGHAI: China's central bank conducted its largest one-day fund injection in seven months on Tuesday, easing fears of quarter-end cash crunch such as the one that roiled global markets in late June.

The People's Bank of China injected 88 billion yuan (US$14.4bil) into the money markets through six-day reverse bond repurchase agreements on Tuesday, its largest one-day injection since the week before the Spring Festival holiday in February.

"The central bank's move has settled people's mood. The (funding) market has improved compared to yesterday," said a Shanghai-based money market trader.

The interest rate that banks charge each other for overnight loans fell, declining to 3.64% on a weighted average basis, down from 3.87% at Monday's close.

The benchmark seven-day bond repo rate edged up but remained in a comfortable range, hitting 4.53% on Tuesday from 4.40% on Monday.

Chinese banks typically hoard cash near quarter-end in order to meet regulatory checks and fund payouts on maturing wealth management products. That contributed to a spike in rates at the end of June, when the benchmark seven-day cash rate hit 30% for some trades.

Market participants widely viewed the June squeeze – during which the central bank refused to inject funds, even as rates soared to unprecedented levels – as a warning by regulators for banks to curb risky off-balance-sheet lending.

The PBoC later confirmed that interpretation but also appeared to admit that it had underestimated the severity of the cash squeeze it helped to engineer. The Shanghai Composite Index plunged 5.3% on June 24 amid rumours that some banks had defaulted on interbank loans.

This time around the PBoC seems intent on heading off a repeat of June's events, traders say. China's interbank market will be closed from Oct 1 to 7 for the National Day holiday, adding to already-elevated cash demand related to the end of the fiscal quarter.

Credit data for August released last week showed that total social financing – the broadest measure of credit flows to the real economy – nearly doubled in August from July.

Some observers interpreted looser liquidity in August as a sign that authorities had quietly opened the credit tap after the June liquidity crunch to ensure that the economy's slowdown would not be too sharp in the run-up to a top-level government meeting on economic reform in November.

But the latest injection of six-day liquidity leaves the central bank ample room to adjust policy if conditions appear too loose. The PBoC has recently paired its injections of short-term funds with corresponding withdrawals of longer-term funding.
This was achieved by re-issuing some maturing three-year central bank bills. The re-issues effectively locked up long-term funds that would have flowed into the market were they not rolled over – Reuters