Cen­tral bank in­jects liq­uid­ity into mar­ket

Last week’s credit squeeze in China was a stark re­minder of con­tin­u­ing stresses in the fi­nan­cial sec­tor, Xie Yu re­ports from Shang­hai

China Daily (Hong Kong) - - FRONT PAGE -

Traders sighed with relief on Tues­day, af­ter cash rates in China’s money mar­ket eased in re­sponse to fresh liq­uid­ity from cen­tral bank open mar­ket op­er­a­tions.

But the vo­latil­ity isn’t over — in­deed, it will be a reg­u­lar fea­ture in the fu­ture, ex­perts warned.

“Sea­sonal fac­tors con­trib­uted to the re­cent tight con­di­tions, but they’re not the fun­da­men­tal prob­lem,” said Xu Gao, chief econ­o­mist and head of eco­nomic re­search at China Ever­bright Se­cu­ri­ties Co Ltd.

It seems the cen­tral bank is try­ing to use high rates to force fi­nan­cial in­sti­tu­tions to cut credit to cer­tain sec­tors, in­clud­ing prop­erty and lo­cal gov­ern­ments, in the face of in­flated as­set prices, Xu said.

But China’s cap­i­tal mar­ket isn’t en­tirely rate- sen­si­tive, and it will ex­pe­ri­ence fre­quent “liq­uid­ity crunches”, es­pe­cially at the end of months or quar­ters, he added.

The con­tin­u­ing process of in­ter­est rate lib­er­al­iza­tion is mak­ing it even harder to price cap­i­tal, and that in­ten­si­fies rate vo­latil­ity, said Chen Li, chief China eq­uity strate­gist with UBS Se­cu­ri­ties Co Ltd.

The Peo­ple’s Bank of China, the coun­try’s cen­tral bank, sus­pended open mar­ket op­er­a­tions in late Novem­ber. That was well be­fore money mar­ket rates surged last week.

The seven-day re­pur­chase rate, a gauge of liq­uid­ity in the fi­nan­cial sys­tem, in­creased 100 ba­sis points to a six-month high of 7.6 per­cent in Shang­hai last Fri­day, com­pared with 7.22 per­cent dur­ing the June crunch.

On that day, the PBOC in­jected 300 bil­lion yuan ($494 mil­lion) to tar­geted re­cip­i­ents, but the move didn’t calm fear­ful in­vestors. The seven- day repo rate fi­nally de­clined on Tues­day when the cen­tral bank re­sumed re­verse re­pos.

Sit­ting on about 20 tril­lion yuan of re­serve de­posits, which can al­ways be re­leased into the in­ter­bank sys­tem, the cen­tral bank is more than ca­pa­ble of keep­ing a liq­uid­ity squeeze from turn­ing into some­thing more se­vere, an­a­lysts said.

“What hap­pened this time and back in June ac­tu­ally re­sulted from the PBOC’s hands-off pol­icy,” said Xu.

The au­thor­i­ties have been wor­ried about as­set price bub­bles and funds be­ing di­verted from where they are needed.

Also, the PBOC has been urg­ing banks to bet­ter man­age liq­uid­ity, cut their off-bal­ancesheet loans and match the ma­tu­ri­ties of as­sets and li­a­bil­i­ties.

“I think the PBOC keeps warn­ing banks about us­ing cheap of­fi­cial funds to fi­nance the shadow bank­ing sec­tor,” said Vivien Li, a money mar­ket trader with a mid­sized bank in Shang­hai.

The cen­tral bank un­der­stands that the goal can’t be achieved in­stantly, and it will make sure fi­nan­cial in­sti­tu­tions don’t run out of cash. But that’s not the same as engineering an eas­ing in fund­ing con­di­tions, Xu said.

Dur­ing the squeeze in June, there were ru­mors that a Chi­nese bank had de­faulted on a loan to another bank. Ahead of its re­cent ini­tial pub­lic of­fer­ing in Hong Kong, China Ever­bright Bank Co Ltd dis­closed in its prospec­tus that two of its branches had failed to pay 6.5 bil­lion yuan of in­ter­bank loans due on June 5. The pay­ment was later made.

A just-re­leased re­port from the Chi­nese Academy of So­cial Sciences said the debts of the na­tion’s lo­cal gov­ern­ments may have reached al­most 20 tril­lion yuan.

The of­fi­cial state­ment from the Cen­tral Eco­nomic Work Con­fer­ence ear­lier this month de­fined “con­trol­ling and de­fus­ing” lo­cal gov­ern­ment debt risks as “an im­por­tant eco­nomic task”.

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