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PBC moves to inject funds

By Wang Xinyuan (Global Times)

08:04, June 27, 2012

China's central bank yesterday injected 95 billion yuan ($15 billion) into the money market through reverse bond repurchase agreements (reverse repos) in order to relieve a squeeze in liquidity, as banks are short of the money needed to meet regulatory requirements.

The People's Bank of China (PBC) injected the money through 14-day reverse repos in its regular open market operations yesterday. This is the third time that the central bank has used this measure this year.

The recent hike of interbank rates showed the tightening of short-term liquidity, but the central bank's move can ease the situation, Chang Jian, China economist at Barclays Capital, told the Global Times yesterday.

The rate for the PBC's reverse repos is set at 4.2 percent, lower than the benchmark 2-week Shanghai Interbank Offered Rate (SHIBOR) which was at 4.7967 percent yesterday, jumping from 3.0358 percent on June 18.

Other benchmark SHIBORs have also risen substantially since last week. The overnight and 1-week SHIBOR were 3.8775 percent and 4.28 percent yesterday, up 1.34 and 1.72 percentage points respectively from June 18.

At the end of each quarter, commercial banks have to meet regulatory requirements such as the 75 percent loan-to-deposit ratio. But with less capital inflow and an expansion in lending, many banks are short of liquidity to meet the requirement.

"Some large banks are now reluctant to conduct interbank lending. That's why the interbank rates have risen recently," Liu Ligang, chief China economist at Australia & New Zealand Banking Group, told the Global Times.

As well as open market operations, the central bank might also cut the reserve requirement ratio (RRR), so that banks can lend more to cash-strapped small and medium-sized enterprises (SMEs), Liu said.

The RRR is the requirement for commercial banks to lodge part of the deposits they receive with the central bank. The PBC has twice cut the RRR so far this year and currently the RRR is 20 percent for large banks and 16.5 percent for smaller ones.

With the slowdown of the world's second largest economy and weakening external demand as a result of the European debt crisis, Chinese SMEs urgently need financial support, Liu noted.

The HSBC Flash Purchasing Managers Index (PMI), a monthly indicator that tracks SMEs' industrial activity, fell to a seven-month low of 48.1 in June from a final reading of 48.4 in May. The latest index also marks the eighth consecutive month that the HSBC PMI has been below 50, which indicates contraction.

Liu forecast that the PBC might cut the RRR three more times in the second half of the year.

But the central bank is unlikely to lower the interest rate again because of inflation concerns, and also because lower interest rates mean depositors have negative returns when saving their money with banks, Liu noted.

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