Analysts welcome PBOC's tactical interbank injection

The People's Bank of China's decision to pump cash into the interbank market in the lead-up to the Lunar New Year has been a timely shower for smaller, local banks reeling in a credit drought and should keep them from going under in the near future.

Some economists said the central bank had fed "just enough" cash into the interbank market to make sure that banks would still face pressure to improve their loan portfolios in the wake of a rapid rise in higher-risk trust loans and wealth management products.

Despite some instant relief from a credit crunch, they said the PBOC would continue to let interbank rates hover at higher levels to discourage commercial banks from frivolous lending that had helped fuel property price bubbles and excess production capacity.

"The PBOC appears to be trying to feed just enough liquidity to satisfy immediate needs without being seen to be a lender of the first resort for errants," he said. "By adding just enough, the PBOC keeps two-way risks in play and forces banks to better manage their loan portfolios."

McFarland said it was unlikely Beijing would allow a "significant bankruptcy" in the near term as the PBOC was rolling out its statutory loan facility to smaller banks while planning a deposit insurance scheme. That means bankruptcies would probably happen later rather than sooner.

The PBOC pumped 255 billion yuan (HK$326.8 billion) into the interbank market after interbank rates jumped on Monday. But the largest single-day injection of funds in almost a year still saw the seven-day repurchase rate - a barometer of interbank funding availability - close higher at 6.6 per cent yesterday, up from 6.32 per cent on Monday.