China cbank faces money market stability challenge

The People's Bank of China is adding administrative orders to its toolbox to calm money markets amid record capital outflows and a surge in cash demand before Year of the Monkey celebrations.

The monetary authority told some banks to cancel repurchase agreements at interest rates it deemed excessive, people familiar with the matter said on Friday. It also advised some institutions to keep rates on the short-term loans below certain levels, they added. Seven-day repos were conducted on Wednesday at 4.5 percent, the highest level since June and double the rate the PBOC charges for similar funds in open-market operations.

"It is one of the PBOC's priorities to stabilize interbank rates ahead of the Chinese New Year," said Albert Leung, a Hong Kong-based rates strategist at Nomura Holdings Inc. "They don't want to see a liquidity squeeze like they had in previous years."

The PBOC has used a variety of lending tools to inject more than 1.3 trillion yuan ($198 billion) into the financial system this month to keep borrowing costs from climbing amid the weakest economic growth in a quarter century. Guotai Junan Securities Co. sees cash demand growing by about 3 trillion yuan in the run-up to the week-long Chinese New Year holiday starting Feb. 8, adding to pressure caused by capital outflows that reduced the nation's foreign-exchange reserves by more than $100 billion last month. The runup to Chinese New Year holidays and quarter-end book closings are times of liquidity shortages that have often caused wild gyrations in money-market rates.