PBOC fails to calm jittery money markets
Money rates rise again on the mainland despite central bank's efforts, leading to declining stocks and fears of another liquidity squeeze
Mainland money rates spiked for a third day yesterday, to their highest since a huge cash crunch in June, despite regulators' efforts to steady the market, raising fears that another liquidity squeeze was under way and driving mainland stocks sharply lower.
The interbank market stresses highlighted the difficulty regulators have in gradually raising the cost of short-term credit to rein in speculative forms of finance without setting off destabilising spikes in adjacent markets.
They also reflected a more fundamental problem within the economy: poor communication by a central bank accustomed to manipulating the cash supply from behind the scenes.
"We believe the PBOC [People's Bank of China] is faced with some serious challenges with rapid unfolding of bottom-up interest rate liberalisation and is confused on whether to target volume or rates [prices] of liquidity," wrote Lu Ting, an economist at Bank of America Merrill Lynch.
"With its limited predictability of flows and its insensitivity to market reactions, the PBOC finds it much more likely than before to make operation mistakes."
The PBOC … is confused on whether to target volume or rates of liquidity
The benchmark seven-day bond repurchase contract began rising on Wednesday, and the rise accelerated when the PBOC refrained from injecting cash into the system during regularly scheduled open market operations on Thursday, the fifth straight session it stayed on the sidelines.
