China Central Bank Injects Funds to Ward off Cash Crunch

China’s central bank, the People’s Bank of China (PBOC) has injected funds into money markets via open market operations for the first time since February, easing fears of a further cash crunch ahead of the month end after a severe cash squeeze last month triggered market volatility.

Market participants and investors in adjacent markets have been monitoring China’s interbank money market after the PBOC allowed a credit crunch to occur in late June as a warning against risky lending practices.

The PBOC injected 17 billion yuan (CNY), equivalent to US$2.77bn, into the money markets through seven-day reverse bond repurchase agreements on Tuesday, the first time in nearly six weeks that it has engaged in open market operations, and the first time it has issued reverse-repurchase operations (repos) to inject funds since early February.

However, the PBOC set the seven-day reverse repo rate at 4.4%, significantly higher than the previous official guidance rate of 3.35%, 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 that while PBOC wants to ensure the market is sufficiently liquid it also intends that cash to be relatively expensive.

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