China cash crunch eases as PBoC reassures
China’s cash squeeze has abated after the central bank reassured investors that it wants to avoid deeper turmoil by making its first market-wide money injection in three weeks. The People’s Bank of China pumped Rmb29bn ($4.8bn) into the financial system via open-market operations on Tuesday morning. Although the injection was tiny relative to the country’s Rmb100tn banking market, it was an important gesture to coax wary lenders back into doing business with each other. The relief was virtually immediate. The seven-day bond repurchase rate, a key gauge of short-term funding, fell 344 basis points to 5.4 per cent, the steepest decline in more than two years, as liquidity improved. Chinese banks had been hoarding money, charging each other nearly 9 per cent to borrow cash in a near doubling of rates from just one week earlier, a sign of extreme stress in the interbank market. Over the past week the central bank had provided targeted money to cash-strapped lenders but it had yet to offer any liquidity via its open-market operations, a more transparent and powerful channel for influencing the financial system. On Tuesday morning that changed. Traders said the PBoC stepped forward to offer Rmb29bn in seven-day reverse bond repurchase agreements for the first time since early December – in effect, providing an extra dose of cash to the market for the next week. In a signal of its determination to end the cash crunch, the central bank announced the injection to banks about 10 minutes earlier than normal, a move that let the news spread more widely in Chinese money and equity markets as they reopened. The Shanghai Composite, China’s main stock index, rose 0.7 per cent in the morning’s trading session. "The worst of this round is over," said Zhou Hao, an analyst with ANZ. At the same time, he noted that trouble could rear its head again soon, with renewed tightness likely in late January before the Chinese new year when demand for money increases dramatically. The turmoil of the past few days – China’s second cash crunch in half a year – has shown a harsh spotlight on rising risks in the world’s second-biggest economy. While still growing at nearly 8 per cent a year, China is increasingly laden with debt and the government has embarked on reforms that could be bitter medicine for an economy that has become overly reliant on cheap capital. The repeated bouts of stress in China’s money markets are signs that debt deleveraging has begun but also that the process is likely to be painful Nevertheless, while the central bank has pushed for some tightening of monetary conditions, analysts say it did not want to see such a steep spike in interbank rates. In an indication that it wants interbank lending conditions to ease, it offered its reverse repos at 4.1 per cent on Tuesday, the same level as before the cash crunch. There had been uncertainty about whether the central bank would make an injection in its open-market operations on Tuesday. Mark Williams, an analyst with Capital Economics, had predicted an injection: "It is in nobody’s interest for this to continue for a prolonged period," he said before the news. Liquidity is traditionally tight in China at the end of the year as corporate demand for cash rises and banks rush to book deposits on their balance sheets to meet regulatory requirements. The competition for deposits has been compounded by the growing array of bank-like institutions that offer higher-yielding alternatives for savers. Moreover, analysts believe the central bank overestimated government spending in the final weeks of the year, leading it to believe that liquidity would be more ample than it has turned out to be. As interbank rates have risen, the central bank has tried to persuade investors that monetary conditions are loose enough by pointing to the Rmb1.5tn of excess reserves in the banking system. It has nudged banks sitting on unused cash to step forward to ease the money-market gridlock.