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China's banks suffer liquidity risks through PBoC inaction

China’s banks suffer liquidity risks through PBoC inaction

(24 June 2013 – China) China’s benchmark money-market rates dropped 384 basis points to 7.90 percent at the end of last week after the central bank made funds available to lenders amid a cash squeeze.

Interbank lending rates spiked last week as the monetary authority refrained from using open-market operations to address a cash crunch in the world’s second-largest economy.

The People’s Bank of China (PBoC) added 50 billion yuan (A$8.8 billion) to the financial system through short-term liquidity operations yesterday, Hao Hong, chief China strategist at Bank of Communications in Hong Kong told reporters.

A central bank press official said he was unaware of the matter, requesting anonymity in keeping with bank policies.

Maturing notes added a net 28 billion yuan to the financial system this week, down from 92 billion yuan last week.

The one-year interest-rate swap, the fixed cost needed to receive the floating seven-day repo rate, dropped 19 basis points to 4.51 percent in Shanghai, according to a source. It reached an all-time high of 5.06 percent on Friday.

Banks paid 6.5 percent for 40 billion yuan of six-month deposits from the Finance Ministry at an auction yesterday, the highest rate since March 2012 and up from 4.8 percent at the previous sale on May 23.

The yield on top-rated commercial banks’ six-month debt was 5.87 percent yesterday, the highest since 2007 and 199 basis points more than at the start of this month, according to data.

The PBoC sold 2 billion yuan of three-month bills on Thursday at a yield of 2.91 percent, after a similar-sized sale at the same rate two days earlier.

The monetary authority has refrained from conducting reverse-repurchase agreements, which inject funds, since February.

China’s State Council, led by Premier Li Keqiang said the country’s banks need to step up efforts to support economic reforms and do more to contain financial risks.

Policy makers could be taking advantage of tight funding to "punish" some small banks, which previously used low interbank rates to finance purchases of higher-yielding bonds, Bank of America Merrill economists led by Lu Ting wrote in a report last week. Tight interbank liquidity could last until early July, according to the report.

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