PBOC pumps 255b yuan into interbank market
Analysts expect more cash to be injectedin the near future after surge in the benchmark repurchase ratetriggers the central bank's move
The People's Bank of China injected 255 billion yuan (HK$326.8 billion) into the interbank market in the largest single-day injection of funds in almost a year, but more liquidity is probably needed to quench the country's cash-thirsty financial system.
The central bank pumped the cash into the seven and 21-day reverse bond repurchase agreements yesterday, following a rate surge on Monday when the benchmark seven-day bond repurchase rate was quoted as high as 10 per cent.
"The PBOC will likely have to release more liquidity for the holiday season than last year," said Fan Wei, an analyst at Hongyuan Securities. "The higher indebtedness of China's economy generates huge demand for funds and any default will have a knock-on effect in the financial system and exacerbate the cash shortage."
The seven-day repurchase rate, a gauge of interbank funding availability, dropped 88 basis points to 5.44 per cent in Shanghai, the daily fix compiled by the National Interbank Funding Centre showed. It rose later to close at 6.6 per cent.
"It suggests the size of the injection is still insufficient. We can expect further liquidity releases in the near future," Fan said.
Analysts said the PBOC would need to do more to counter the possible credit crunch following at least two rate shocks last year.
The central bank injected more than 1.3 trillion yuan in January and February last year. This year, the amount would need to be larger to avoid a cash squeeze, analysts said.
"The situation is that a cash crunch will take place periodically, and the money market can only rely on the central bank's feeding to maintain stability. Once the feeding stops, money rates soar," Song Hongbing, an independent financial expert and author of the bestselling book, Currency Wars, said in his Sina blog.
"When cash flow generated from the real economy is unable to repay high debts in the financial system, a cash squeeze … forces the central bank to intervene more frequently and intensively."
On Monday, the central bank added funds to large commercial banks through its standing lending facility and allowed small and medium-sized banks in 10 regions to tap the facility on a trial basis before the week-long Lunar New Year holiday beginning on January 31.
The Shanghai Composite Index rose 0.86 per cent to 2,008.31 points yesterday, the biggest gain for the benchmark index in a week.
Funds have been flowing to real estate developers and companies in industries that cannot get loans from banks but instead rely on trust firms and players in the shadow banking system.
"If any of these problematic borrowers default, risk will spread from the shadow banking system to the whole financial system as they are connected by the interbank system," said Yuan Gangming, a researcher at the Chinese Academy of Social Sciences.
Loans to local government financing vehicles have been rolled over to avoid the outbreak of a bad-loan crisis. Local government debt has swollen to 17.9 trillion yuan, nearly 70 per cent more than previously disclosed, according to official data.