Central Bank Intervention Boosts Market

In an effort to deflect a repeat of the cash crisis experienced by China’s economy in June, the People’s Bank of China reportedly pumped Rmb17 billion via seven-day reverse repurchase agreements into the money market on Tuesday June 30, being the central bank’s first intervention of this kind since February 7 this year. Although the amount was relatively limited, it realized its goal of preventing cash rates from rising too high, and its impact on markets was immediately evident. As a vital indicator of short-term liquidity in China, the seven-day bond repurchase rate dropped by 14 basis points to 4.98 percent, while the Shanghai Composite Index gained nearly 1 percent.

With interbank lending rates climbing due to pressure at month-end for fund redemption, investors have been concerned that the central bank may steer the market into a similar situation as experienced in June. At that time the central bank held back from injecting cash into the system despite the fact that money rates were rising. This led banks to hold back on inter-bank lending which sent money market rates to over 20 percent – an unprecedented level. To alleviate the problem, the central bank made emergency liquidity provisions available to cash-strapped banks. The message from the central bank was that the cash squeeze served as a warning to lenders to improve the management of their liquidity while reining in overall credit growth.

Official statements over the past few months have indicated that authorities are taking action to ward off financial risks, while at the same time promoting stable development of China’s economy in the second half of 2013. Analysts are generally of the opinion that these statements reveal no sense of urgency and that the current stance of authorities is likely to prevail for the remainder of the year.