PBOC Injects Funds to Fend off New China Cash Crunch

The People’s Bank of China (PBOC),
which in July pumped liquidity into the markets
following a record cash crunch in China the previous month, has again added funds to selected banks to avoid a repetition.

The PBOC took the unusual step of announcing via Weibo, the Chinese equivalent of Twitter, that it had carried out a short-term liquidity operation, or SLO. Trading was also extended by an extra half an hour, to allow banks to benefit from the measure. However, no details were provided about the scale of the SLO or which banks had been involved.

China’s central bank has been progressively tightening financial conditions over recent months to rein in excessive lending growth in the economy. Most recently it cancelled its usual daily ‘open market operations’, which push money into the markets.

As a result, interbank lending rates – a key measure of market stress – rose sharply to revive fears of a crunch. “The story of the past few months has been that the PBOC wants to tighten monetary conditions to slow credit growth, and that’s been happening in fits and starts,” said Mark Williams, of consultancy Capital Economics.

Reports also quoted Diana Choyleva, China expert at Lombard Street Research in London, who said the run-up in interbank rates suggested that
the major financial reforms announced last month by Beijing
at the policy plenum are likely to be disruptive in the short-term, as banks wrestle with the legacy of years of over-investment.

“Since the plenum the PBOC have been tightening; but they’re not there to tank the whole thing, so as and when, they have to intervene to alleviate a particular pressure,” she said. “I would argue for reform to be successful, there’s no way you can do it without going through short-term pain.”

The PBOC injected 200 billion yuan (CNY) – about US$32.9bn – in its latest move, according to online financial news provider Netease, which cited an unidentified person.

“The PBOC probably has learnt its lesson from June and so they came out to make an adjustment before the rates got too high,” said Tse Kwok Leung, Hong Kong-based head of policy and economic research at Bank of China. “A rapid surge in borrowing costs is definitely harmful and makes everyone in the market nervous. From a macro-policy perspective, the PBOC would want to avoid that.”

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