China injects cash to ease credit crunch
China's benchmark money-market rates tumbled from record highs after the central bank injected funds to alleviate the worst cash crunch in at least a decade.
The overnight repurchase rate dropped 442 basis points, or 4.42 percentage points, to 8.43 per cent in Shanghai, according to a daily fixing compiled by the National Interbank Funding Center. That is the biggest drop since October 2007.
The seven- day rate fell 227 basis points today to 8.50 percent, the largest decline since January 2012.
''The worst is over; the PBOC is likely to serve as a last resort and intervene to calm the markets and avoid such huge volatility,'' said Chen Qi, a rates strategist at UBS Securities Co. in Shanghai. ''Although a reduction in interest rates or reserve ratios is not likely in order to avoid confusing policy signals, we do think reverse repos are very likely to be resumed and PBOC will use window guidance as well. We expect liquidity tightness to persist.''
Interbank lending rates spiked this week as the monetary authority refrained from using open-market operations to address a cash crunch in the world's second-largest economy.
The People's Bank of China added funds to the financial system via short-term liquidity operations yesterday, according to Hao Hong, chief China strategist at Bank of Communications Co. in Hong Kong.
The central bank did not respond to faxed questions seeking comment.Targeted InjectionsThe PBOC used reverse-repurchase agreements to inject funds into selected banks, Hexun reported today, citing an unidentified person close to the central bank.
Industrial & Commercial Bank of China and Bank of China were among lenders that received funds, the financial news website said. An ICBC spokesman declined to comment on the report, while a Bank of China spokesman was unavailable.
''The PBOC did not inject liquidity across the board, so if any injections were made, they were likely explicitly targeted at specific banks facing liquidity problems,'' Zhiwei Zhang, chief China economist at Nomura in Hong Kong, wrote in a report today.
''We believe that recent action by the PBOC reflects the government's determination to take aggressive action to contain financial risks.''
An intra-day gauge of the overnight repo rate touched a record 30 per cent yesterday and was 8.70 per cent as of 12.37pm today in Shanghai. There were five transactions recorded yesterday after 3.30pm at rates of 4.11 per cent to 4.35 per cent, while the average for the whole day was 13.94 per cent, according to data compiled by Bloomberg.
For seven-day contracts, there were five trades after 3.55pm at rates of 4.72 per cent to 4.75 per cent, compared with the day's average of 12.61 per cent.
Maturing notes added a net 28 billion yuan to the financial system this week, down from 92 billion yuan last week. Chinese banks need to step up efforts to support economic reforms and do more to contain financial risks, the State Council said June 19 after a meeting led by Premier Li Keqiang.
The central bank may make open-market adjustments to keep ''reasonable and stable'' interbank liquidity, Financial News reported today, citing an unidentified analyst. China's economic slowdown may deepen in the short term as policy makers pursue a prudent monetary policy to control financial risks, the report in the PBOC-controlled newspaper said.
The one-year interest-rate swap, the fixed cost needed to receive the floating seven-day repo rate, dropped 30 basis points to 4.40 per cent in Shanghai, according to data compiled by Bloomberg. It reached an all-time high of 5.06 per cent yesterday. The seven-day repo fixing has averaged 6.70 per cent this month, the most in National Interbank Funding Center data going back to the start of 2004.