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PBOC Will Use Tools to Stabilize Money Markets

Issuing its second statement in two days, the People’s Bank of China said it would offer liquidity to banks to ease investors’ fears of a cash crunch. The People’s Bank of China has provided liquidity to some financial institutions (though did not specify the amount or the banks) to stabilize money-market rates and will use short-term liquidity operations and standing lending-facility tools to ensure steady markets.

 

“If institutions have problems in managing their liquidity, the central bank will apply appropriate measures under the circumstances to maintain the overall stability of money markets”

 

In its statement, the central bank said money markets were already on the mend after interbank rates rose to double digits last week. It noted that the overnight bond repurchase rate had fallen to 5.83%. It also reiterated its view that a series of temporary technical factors, including tax collection and end-of-quarter regulatory deposit requirements, had exacerbated the market’s tightness.

 

“With the elimination of seasonal and emotional factors, interest-rate fluctuations and the tight liquidity situation will gradually ease”

 

The statement is the first public confirmation of central bank action to ease a crunch that sent China’s overnight repurchase rate to a record last week and stood in sharp contrast to one issued the day before in which the PBoC took a much harder line, declaring that liquidity was at a “reasonable level” and telling lenders to manage their balance sheets.

Chinese Money Market Rates Rise as Govt Bond Auction Fails and PBOC Remains Passive

China’s short-term funding costs jumped on Friday as the central bank kept liquidity relatively tight and the Chinese government failed to sell all its bonds at an auction.

 

The benchmark weighted-average seven-day bond repurchase rate, a key gauge of short-term liquidity, jumped 48 bps to 6.87% on Friday (its highest since Jan 2012), up from less than 3% a month ago. The overnight repo rate rose 8 bps to 7.02%, while the 14-day rate surged 44 bps to 7.65%.

 

In parallel, the finance ministry sold only CNY9.5B of the CNY15B in government debt on offer, the first time in nearly two years that the ministry has not reached its target bond sale.

 

PBOC has refused to inject cash into the market on a large scale, even as money rates rose steadily in recent weeks. The fact is that money supply (M2) still increased at steady rate in May at 15.8% YoY while the official target is only 13%. Moreover, housing prices keep on rising and should reach in May their highest level since last summer.

 

This tightness in China’s financial system is the indication that the government appears ready to tolerate slower growth to control several risks (overall accumulation of debt as well as the lightly regulated “shadow banking” institutions) and to favorize the consumer welfare (less inflation and higher purchasing power, easier access to property market).

 

Finally, with the quarter-end approaching, when banks traditionally try to increase deposit totals and diminish lending, liquidity could remain tight at least until the beginning of Q3. It means that Q2 GDP should slow and could be below 7.5%. On the positive side, in Q3, PBOC will have more room (slowdown of M2, CPI, PPI,  measures to curb housing prices) to reverse the liquidity squeeze by pumping more short-term cash into the market.