The Chinese central bank has made an emergency money injection after a surge in interbank rates, trying to prevent a repeat of the cash crunch that rattled global markets this year.
In a highly unusual move, the People’s Bank of China said it had conducted a “short-term liquidity operation” to provide credit to banks in need of money.
According to the central bank’s own rules, it is only meant to announce SLOs one month after their implementation, but on this occasion it was unwilling to brook such a delay. It used its account on Weibo, China’s Twitter-like platform, yesterday afternoon to tell a jittery market that it had provided banks with the emergency cash.
Chinese money market rates had soared earlier in the day to levels last seen in late June when the country was hit by a liquidity squeeze that alarmed investors around the world about the potential for a financial crisis in China. The seven-day bond repurchase rate, an important gauge of short-term liquidity, rose to nearly 10 per cent as banks hoarded cash.
The central bank also extended trading in the country’s interbank market by 30 minutes yesterday to give financial institutions additional time to line up funds. The central bank last allowed an extended trading session during the June cash crunch.
“It’s very clear they want to calm market fears,” said Zhou Hao, an analyst with ANZ in Shanghai. “The PBoC does not want to see the cash crunch repeated.”
Yet the immediate cause for the sudden panic gripping the market was the central bank itself. Over five consecutive trading sessions, it had refrained from injecting cash in the financial system through its regular open-market operations.
That surprised traders and posed a challenge for banks, which need to refinance a large number of assets before the end of the year.
During the cash crunch in June, central bank officials explained that they had allowed the money market to tighten as a warning to banks to improve their liquidity management. Several banks had become overly reliant on the interbank market as a cheap source of funds and were using the cash to finance risky off-balance sheet loans.
The central bank has since guided money market rates to levels roughly 150 basis points higher than the average before the cash crunch. With China’s stock of credit soaring to about 200 per cent of gross domestic product, from 130 per cent five years ago, analysts believe the government is trying to encourage companies and investors to reduce their debt loads.
“The PBoC wants money market rates to remain relatively high in order to lower leverage and contain financial risks,” said Duan Jihua, deputy general manager of Guohai Securities. “But they won’t push rates so high that it would actually trigger defaults or bankruptcy.”