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PBOC Adds to Bank Funds Amid Worst Cash Crunch Since June

China added funds to selected banks today after the benchmark money-market rate jumped the most since a record cash crunch in June.

The People’s Bank of China conducted short-term liquidity operations recently and will continue to supply funds to qualified financial institutions in this way based on the situation, it said on its microblog. The announcement did not give details of the size or pricing of the cash injections. The monetary authority injected 200 billion yuan ($32.9 billion), online financial news provider Netease reported, citing an unidentified person.

The seven-day repurchase rate, a gauge of funding availability in the banking system, jumped 140 basis points to

6.60 percent, according to a daily fixing by the National Interbank Funding Center. That is the biggest increase since a 270 basis point jump on June 20 that drove the rate to an all-time high of 10.77 percent and prompted the central bank to conduct short-term liquidity operations. The seven-day repo tumbled 227 basis points the following day.

“The PBOC probably has learnt its lesson from June and so they came out to make an adjustment before the rates got too high,” Tse Kwok Leung, Hong Kong-based head of policy and economic research at Bank of China (Hong Kong) Ltd., said by phone today. “A rapid surge in borrowing costs is definitely harmful and makes everyone in the market nervous. From a macro-policy perspective, the PBOC would want to avoid that.”

Calm Market

One-year interest-rate swaps that exchange fixed payments for the seven-day repo increased eight basis points to 4.98 percent in Shanghai today and earlier touched 5.07 percent, the highest in data going back to April 2006. Concern about rising borrowing costs pushed the Shanghai Composite Index of shares down 1 percent today, an eighth straight decline, and the Hang Seng China Enterprises Index slumped 1.7 percent in Hong Kong.

“The short-term liquidity operations can calm the market,” Hao Hong, head of China research at Bocom International holdings Co. in Hong Kong, said by telephone today.

The PBOC refrained from saying which banks it supplied funds to today. Calls to the Beijing press offices of China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd. were unanswered after office hours. A Beijing-based press officer at Industrial & Commercial Bank of China Ltd. declined to comment.

Reverse Repos

Borrowing costs are climbing in China as the government gives market forces a greater influence in determining interest rates and the central bank curbs the use of open-market operations to provide funds. The PBOC has refrained from conducting reverse-repurchase operations for more than two weeks, the longest pause since July. Reverse-repurchase agreements involve short-term asset purchases that add funds to the financial system.

China Foreign Exchange Trade System extended money-market trading hours by 30 minutes today, the first extension since June 19, the day before money-market rates reached all-time highs.

The PBOC said in January it would use short-term liquidity operations as an additional tool to manage cash supply, adding that these would mainly involve the use of repurchase agreements and reverse repos with maturities of less than seven days. It named 12 banks, including Industrial & Commercial Bank of China and Bank of China, as participants in the operations, which supplement regular open-market auctions held each Tuesday and Thursday.

Delayed Disclosure

The central bank confirmed on June 25 that it provided liquidity to some financial institutions to stabilize money-market rates, after media reports said it used repos to inject funds into selected banks. The authority injected 41 billion yuan on Oct. 28 and 18 billion yuan on Oct. 30 via short-term liquidity operations at 4.50 percent, it said in a Nov. 29 statement.

Today’s actions show “the PBOC doesn’t want interest rates to be too high, but at the same time, it’s not willing to send a public message that monetary policy will be loosened,” said Cici Wang, a Beijing-based fixed-income analyst at Citic Securities Co., the nation’s biggest brokerage by market value.

(Adds analyst quote in fourth paragraph.)