Volatility in China’s short-term interest rates has everyone a bit on edge. Illiquid short-term credit and surging rates represent major problems for the many companies that rely heavily on this type of financing.
On Tuesday, these rates spiked with the overnight repo rate spiking to a breathtaking 9%. And as usual in recent months, the People’s Bank of China intervened. This time, it injected around 225 billion yuan into these short-term credit markets.
“Such a response is not unusual as the PBoC has become notably more active in stabilising liquidity conditions after the dramatic squeeze in June 2013,” said Societe Generale’s Wei Yao.
“However, what is unusual (and encouraging) this time is the use of communication,” added Yao. “Shortly after the fact, the PBoC made the standing lending facilities operation public and informed the market of the reverse repo operations before they took place. Moreover, the central bank announced that it is to start a trial of direct liquidity injections into small and medium-sized financial institutions. However, what is unusual (and encouraging) this time is the use of communication. Shortly after the fact, the PBoC made the SLF operation public and informed the market of the reverse repo operations before they took place. Moreover, the central bank announced that it is to start a trial of direct liquidity injections into small and medium-sized financial institutions.”
Improved communication has been the popular trend among the world’s central banks like the Federal Reserve, the European Central Bank, and the Bank of England.
“This is a positive development,” said Yao. “Rule-based monetary policy and its implementation certainly offer a much greater degree of transparency and helps guide and stabilise market expectations. It is one step closer to a desired policy regime. Providing direct support to smaller banks also helps improve the efficiency of liquidity management, especially as big banks increasingly hoard cash to address their own liquidity problem.”
All of this comes as China prepares for the Lunar New Year.
“To be sure, we don’t think the PBoC’s liquidity injection ahead of the Lunar New Year is a surprise.” said Bank of America Merrill Lynch’s Xiaojia Zhi. “The jump in cash demand ahead the LNY is genuine because corporates need to pay salaries (for many migrant workers, most of their annual compensations are paid right before LNY) and settle payments while households withdraw cash for shopping for the biggest holiday of the year. Post the LNY holidays, cash returns to banks and usually the PBoC needs to drain the extra liquidity it injects before the LNY.”
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