* C.bank gives funds to big banks via Standing Lending
* PBOC also offers up to 120 bln yuan to small
* C.bank responds to criticism over poor communication
* PBOC strives to reduce debt but avoid acute credit squeeze
By Jason Subler and Gabriel Wildau
BEIJING/SHANGHAI, Jan 20 China's central bank
has provided emergency funding support to commercial banks and
will add more cash on Tuesday, as authorities respond to a spike
in cash rates ahead of a major holiday, the bank announced on
The move by the People's Bank of China (PBOC) comes after
the interest rate that banks charge each other for short-term
loans spiked in recent days.
Bankers and analysts say the PBOC is attempting to strike a
balance by guiding interbank interest rates steadily higher to
reduce excess credit growth, while avoiding an acute credit
crunch that could spark panic and choke off financing to the
The central bank also appears to be responding to criticism
that it failed to communicate effectively with the market during
a severe cash crunch that roiled markets in June. Bankers and
analysts criticised the PBOC for remaining largely silent as
panic gripped the market and rumours swirled about interbank
"The central bank's operations are just a flexible response
to the liquidity situation. They weren't planning to inject
funds," China International Capital Corp (CICC) wrote in a note
to clients late on Monday.
The PBOC said via its official Twitter-like Weibo micro-blog
that it had provided an unspecified amount of funding to the
largest banks via its Short-term Lending Facility (SLF).
The central bank also said it will inject further cash into
the banking system at regularly scheduled open market operations
on Tuesday. The central bank has not injected funds through such
operations since Dec. 24.
Indeed, long-time market watchers said it's virtually
unprecedented for the central bank to openly declare its
intention to inject or withdraw funds at regularly scheduled
open market operations. Typically, the market learns of these
operations only after they are conducted.
But in an echo of previous statements, the PBOC again urged
banks to improve liquidity management. Regulators have also
expressed concern about some banks' excessive reliance on
short-term funding markets.
Bankers say the central bank is using higher money market
rates as a tool to curb explosive growth in economy-wide debt
since 2008, especially off-balance sheet credit that banks often
fund through interbank borrowing.
In addition to the support for big banks and the planned
injection on Tuesday, the central bank will also offer
overnight, seven-day, and 14-day funds to smaller banks via SLF,
it said in an announcement on its website.
The PBOC will offer up to 120 billion yuan ($19.8 billion)
in funds to smaller banks through this channel, according to a
central bank document obtained by Reuters.
Analysts say smaller banks rely the most on money-market
funding because their smaller branch networks provide them less
access to customer deposits.
The sources said banks incorporated at the regional or local
level can apply to the PBOC for fund injections via SLF when the
interest rate on the overnight bond repurchase rate
exceeds 5 percent, the seven-day repo rate
exceeds 7 percent, or the 14-day repo rate
exceeds 8 percent, according to three sources
with direct knowledge of the new policy.
Those thresholds will remain in effect through the Lunar New
Year holiday which starts on January 31. After that the
expanded SLF mechanism will remain in place for small banks but
the thresholds could change, the sources said.
A PBOC spokesman declined to comment.
The central bank previously used its SLF to provide one- to
three-month loans to commercial banks. The latest expansion
offers cash injections of 14 days or less.
The overnight repo rate closed at 4.30 percent on a
weighted-average basis on Monday but individual trades occurred
as high as 9 percent.
The seven- and 14-day rates peaked on Monday at 10 percent
and 7.8 percent, respectively, according to data from the
National Interbank Funding Center.
Traders attributed the higher rates to elevated cash demand
in the run-up to the New Year holiday.
The relaunch of initial public offerings of stock is also
boosting cash demand this week. IPOs, restarted last week after
a 14-month freeze, drive demand for short-term funding as
investors need to deposit funds with underwriters in order to
subscribe to new listings.
Eight companies said on Monday that they would list on the
Shenzhen Stock Exchange on Tuesday, the first listings on
China's smaller bourse since the freeze ended.
Traders had previously predicted funding conditions would
tighten in late January. The latest funding squeeze follows
severe cash crunches in late June and late December.
The seven-day rate peaked at 28 percent on June 20, the
highest trade on record, and soared again to 10 percent on Dec.
20 and 23.