China central bank injects funds 1st time since Feb

Written by Reuters | Shanghai | Updated: Jul 31 2013, 20:27pm hrs
Chinas 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 Chinas interbank money vmarket 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 Peoples Bank of China (PBOC) would take advantage of the pressure to engineer another end-month credit crunch if Chinas 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 February.

Stock markets rose on the news. The Shanghai Financials Index opened up 0.5% with China Merchants Bank starting up 0.9% and China Minsheng Bank up 0.3% in Shanghai. They were outperforming the broader market.

However, the central bank set the seven-day reverse repo rate at 4.4%, much higher than the last official guidance rate of 3.35%, setting a relatively high floor for the market rates the contract can trade at.