Caixin
May 29, 2019 03:30 AM
FINANCE

PBOC Adds Liquidity as Bank Seizure Ratchets Up Stress

The central bank has increased the amount and frequency of open market operations in the wake of the Baoshang case. Photo: Bloomberg
The central bank has increased the amount and frequency of open market operations in the wake of the Baoshang case. Photo: Bloomberg

(Bloomberg) — The People’s Bank of China is acting to increase the supply of short-term funding to banks after the seizure of a regional lender rattled domestic markets.

China’s central bank injected a net 150 billion yuan ($21.7 billion) through open-market operations Monday and Tuesday, the most since the week ended March 8. Analysts said the moves are efforts to calm the market after a recent regulatory takeover of a small commercial bank.

Regulators said Friday that they would take control of Baoshang Bank Co., citing “serious” credit risks, fueling worries of failures elsewhere and driving up funding costs.

The benchmark seven-day repo rate rose further Tuesday to the highest in more than a month, in spite of the central bank’s efforts to calm interbank markets. The jitters set off by the Baoshang case also focus scrutiny on whether the central bank will cut the amount of reserves lenders need to hold sooner rather than later, as tax season, bond sales and maturing policy operations drain cash from the banking system.

“The Baoshang incident has made investors question the quality of similar assets and tightened interbank funding,” said Liu Peiqian, Asia strategist at Natwest Markets Plc in Singapore.

About 2.9 trillion yuan are due to be drained from China’s banking system between June and August, according to Bloomberg-compiled data. Without rising stress in the banking system, the PBOC’s preferred course of action would be to keep extra liquidity provision to a minimum, with the government’s debt campaign and the vulnerability of the yuan in mind. A broad cut to the reserve-ratio runs the risk of sending a stronger easing signal than is warranted, depressing the currency.

Nevertheless, if markets are still unstable into June, then a cut in the amount of money that some banks have to park in reserves would become a more likely way for the central bank to ease liquidity fears, Liu said.

The PBOC has increased the amount and frequency of open market operations in the wake of the Baoshang case, and it’s likely to keep injecting short-term funding if money market liquidity remains tight, said David Qu, an economist at Bloomberg Economics in Hong Kong.

“The central bank shouldn’t and can’t try to wipe out market volatility entirely,” but what it can do is just make sure there won’t be any credit crunch, he said, adding he expects the central bank to cut reserve-requirement ratios as soon as the second quarter because of the slowing economy, trade tensions and rising loan maturities.

Contact editor Han Wei (weihan@caixin.com)

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