PBOC to inject more cash into market today
Print Edition
China’s central bank has provided emergency funding support to commercial banks and will add more cash today, as authorities respond to a spike in cash rates ahead of a major holiday, the bank said yesterday.
The move by the People’s Bank of China comes after the interest rate that banks charge each other for short-term loans spiked in recent days.
Bankers and analysts say the PBOC is hoping to strike a balance by guiding interbank interest rates steadily higher to cut excess credit growth, while avoiding an acute credit crunch that could spark panic and choke off financing to the real economy.
The central bank also appears to be responding to criticism that it failed to communicate effectively with the market during a severe cash crunch that roiled markets in June. Bankers and analysts criticized the PBOC for remaining largely silent as panic gripped the market and rumors swirled about interbank defaults.
“The central bank’s operations are just a flexible response to the liquidity situation. They weren’t planning to inject funds,” China International Capital Corp wrote in a note to clients yesterday.
The PBOC said via its official Twitter-like Weibo micro-blog that it had provided an unspecified amount of funding to the largest banks via its Short-term Lending Facility (SLF).
The central bank also said it will inject further cash into the banking system at regularly scheduled open market operations today. The PBOC has not injected funds through such operations since December 24.
Indeed, long-time market watchers said it’s virtually unprecedented for the central bank to openly declare its intention to inject or withdraw funds at regularly scheduled open market operations. Typically, the market learns of these operations only after they are conducted.
But in an echo of previous statements, the PBOC again urged banks to improve liquidity management. Regulators have also expressed concern about some banks’ excessive reliance on short-term funding markets.
Bankers say the PBOC is using higher money market rates as a tool to curb explosive growth in economy-wide debt since 2008, especially off-balance sheet credit that banks often fund through interbank borrowing.
In addition to the support for big banks and the planned injection today, the central bank will also offer overnight, seven-day, and 14-day funds to smaller banks via SLF, it said in on its website.
The PBOC will offer up to 120 billion yuan (US$19.8 billion) in funds to smaller banks through this channel, according to a central bank document.
Analysts say smaller banks rely the most on money-market funding because their smaller branch networks provide them less access to customer deposits.
The sources said banks incorporated at the regional or local level can apply to the PBOC for fund injections via SLF when the interest rate on the overnight bond repurchase rate exceeds 5 percent, the seven-day repo rate exceeds 7 percent, or the 14-day repo rate exceeds 8 percent, according to three sources with direct knowledge of the new policy.
Those thresholds will remain in effect through the Lunar New Year holiday which starts on January 31. After that the expanded SLF mechanism will remain in place for small banks but the thresholds could change, the sources said.
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