China's central bank stabilises money market

China’s one-week repo rate climbed to 9.8% during the morning session on Wednesday, despite the central bank’s intervention to ease the interbank credit crunch.

The People’s Bank of China (PBoC) indicated in a statement Tuesday night that it had been providing liquidity support to some financial institutions during the past few days, and said it would take similar moves to relieve temporary liquidity shortages in future to support banks that have a healthy balance sheet and lend to promising projects or industries.

It is the first time that the PBoC has officially responded to the recent credit crisis within the Chinese banking industry, though it did not specify what criteria it would apply to judge the timing of intervention or which financial institutions it would help.

The pain is not yet over, as banks are still hoarding capital for quarterly reporting requirements. “I think the stress will continue for a while,” says a loan officer at a mid-sized Chinese bank. “The PBoC may have given money to some banks, but it did not turn things around. Banks still need cash, especially at the end of this month when they have to tackle various cash requests.”

The PBoC’s softening tone helped, as the one-week repo rate opened at 7.17% on Tuesday, slightly lower than Monday’s closing. It also dropped around four percentage points from the peak 11.2% on June 20, the highest in 10 years. The average overnight Shanghai interbank rate fell slightly to 5.553% as of writing.

However, the market is indicating that capital pressure will remain intense.

“The main idea of PBoC’s statement is to calm down the market mood and smooth the banks’ expectation. It does not necessarily mean the central bank will take further actions to instill liquidity to the system on a large scale. The bottom line is to prevent systematic liquidity crash. I think the situation [liquidity stress] will last into July,” says Bin Hu, an analyst at Moody’s.