July 30, 2013 / 2:51 AM / 5 years ago

China central bank injects funds, eases fears of repeat cash crunch

* China injects cash through OMOs for first time since late
    * Relieves fears of another cash crunch like late June
    * High guidance rate for 7-day contract indicates c.bank
    * Money rates relax, Chinese fin equities up

    By Pete Sweeney
    SHANGHAI, July 30 (Reuters) - China's central bank injected
funds into money markets via open market operations on Tuesday
for the first time since February, easing fears of another cash
crunch ahead of the month end after a severe cash squeeze in
June caused market panic.
    Market participants and investors in adjacent markets have
been keeping a close eye on China's interbank money market after
the central bank allowed a credit crunch to occur in late June
as a warning against risky lending practices.
    Short-term money rates in China have been rising steadily in
recent weeks as the end of July approached and Chinese companies
and banks stocked up on cash to make dividend payments and get
books in order.
    Some economists had predicted the People's Bank of China
(PBOC) would take advantage of the pressure to engineer another
end-month credit crunch if China's financial sector did not show
signs of reining in risky lending.
    The central bank has never explained its reasoning for
allowing rates to spike in June, and it kept traders guessing in
July, letting maturing instruments inject fresh funds passively
but otherwise taking no direct action.
    That changed on Tuesday.
    The injection, a 17 billion yuan ($2.77 billion)issuance of
seven-day reverse bond repurchase agreements, marked the first
time the central bank had engaged in open market operations
since June 20 and the first time it had issued reverse repos,
which inject funds instead of draining them, since early
    Stock markets rose on the news. The Shanghai Financials
Index opened up 0.5 percent with China Merchants Bank
 starting up 0.9 percent and China Minsheng Bank
 up 0.3 percent in Shanghai. They were outperforming
the broader market.
    However, the central bank set the seven-day reverse repo
rate at 4.4 percent, much higher than the last official guidance
rate of 3.35 percent, setting a relatively high floor for the
market rates the contract can trade at.
    A dealer at a state-owned bank in Beijing said that the
amount injected was small, and yet the official guidance rate
was high, implying the central bank wants to ensure the market
is sufficiently liquid but that cash is relatively expensive.
    "The (high rate) could also serve as a signal that the era
of ultra loose and easy money is over and liquidity has to be
appropriately priced," wrote Wee-Khoon Chong, economist at
Societe Generale in Hong Kong, in a research note to clients.
    Even so, money rates showed signs of easing, with the
volume-weighted seven day repo contract opening
down slightly. Interest rates for 1 day repos and
14-day repos also fell.
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