China injects liquidity into commercial banks

In order to ensure stability within the monetary market before the Lunar New Year, China injects liquidity into its major commercial banks. Commercial banks, as opposed to investment banks, take deposits from people, companies and organizations, and lend money to their customers.

While not specifying how much cash has been placed, the People’s Bank of China explained that leading up to and during this important holiday period the demand for cash among consumers increases considerably.

According to the state news agency Xinhua, the central bank pumped 255 billion yuan (about $42 billion) into the money market.

The People’s Bank of China also set up a lending facility for smaller banks which regularly complain that the bigger players squeeze them out of the interbank market.

The country’s key interbank lending rate rose yesterday. The 7-day repurchase rate reached almost 6.5% on Monday, from 4% at the beginning of this month. Today it fell 88 bases points to 5.44% in Shanghai.

After closing below 2,000 on Monday, the first time since July 2013, the Shanghai Composite Index rose 0.9% today to 2008.31.

The market in China is still vulnerable

Bloomberg Personal Finance quoted Hu Yifan, chief economist at Haitong International Securities Group Ltd., Hong Kong, who said “The PBOC knows it can’t afford any systemic risks even if it wishes to conduct stress tests on the banks. It’s obvious that the market is still vulnerable so the PBOC has to provide cash to ease the shortfall, at least before the Lunar New Year.”

In Hong Kong markets have responded well as China injects liquidity. The Hang Seng China Enterprises Index appreciated by 1.8% to 10218.41, and the broader Hang Seng Index rose 0.5%.

Markets in China have become very sensitive to money market rates at home, after a crash crisis in the summer of 2013 resulted in a dramatic fall in Shanghai. Recently, the increase in rates, combined with slower Chinese GDP growth, resulted in worrying falls in both Shanghai and Hong Kong yesterday.

Central bank concerned about potential liquidity risk

Nomura China economist, Zhang Zhiwei said to Reuters “We think these are significant steps by the PBOC.” He wrote in a research note “These announcements suggest that the central bank is very concerned about potential liquidity risk in the interbank market leading into the Lunar New Year holiday period, as well as the financial risks in small banks.”

Although the central bank’s measures today have helped ease markets somewhat, money dealers are still cautious. The worry is that when the first week of February arrives, China’s main holiday period when people withdraw lots of cash, some IPOs will take place, requiring potential investors to put up cash; this could push interest rates up, especially if there are no further cash injections.