BEIJING / SHANGHAI (Reuters) — China's
central bank has provided emergency funding support to commercial banks
and will add more cash on Tuesday, as authorities respond to a spike in
cash rates ahead of a major holiday, the bank announced on Monday.
The move by the People's Bank of China (PBOC) 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 attempting to strike a balance
by guiding interbank interest rates steadily higher to reduce 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 (CICC) wrote in a note to clients late on
Monday.
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 on
Tuesday. The central bank 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 central bank 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
on Tuesday, the central bank will also offer overnight, seven-day,
and 14-day funds to smaller banks via SLF, it said in an
announcement on its website.
The PBOC will offer up to 120 billion yuan ($19.8 billion) in funds
to smaller banks through this channel, according to a central bank
document obtained by Reuters.
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.
A PBOC spokesman declined to comment.
The central bank previously used its SLF to provide one- to
three-month loans to commercial banks. The latest expansion offers
cash injections of 14 days or less.
The overnight repo rate closed at 4.30 percent on a weighted-average
basis on Monday but individual trades occurred as high as 9 percent.
The seven- and 14-day rates peaked on Monday at 10 percent and 7.8
percent, respectively, according to data from the National Interbank
Funding Center.
Traders attributed the higher rates to elevated cash demand in the
run-up to the New Year holiday.
The relaunch of initial public offerings of stock is also boosting
cash demand this week. IPOs, restarted last week after a 14-month
freeze, drive demand for short-term funding as investors need to
deposit funds with underwriters in order to subscribe to new
listings.
Eight companies said on Monday that they would list on the Shenzhen
Stock Exchange on Tuesday, the first listings on China's smaller
bourse since the freeze ended.
Traders had previously predicted funding conditions would tighten in
late January. The latest funding squeeze follows severe cash
crunches in late June and late December.
The seven-day rate peaked at 28 percent on June 20, the highest
trade on record, and soared again to 10 percent on December 20 and
23.
($1=6.05 yuan)
(Additional reporting by Hong Kong, Shanghai and Beijing newsrooms;
editing by Kazunori Takada, Neil Fullick and Ron Popeski)
