PBOC Said to Inject Funds as IPO Demand Triggers a Cash Squeeze

The People’s Bank of China was said to have added money to the banking system today as a cash shortage stemming from new share sales drove the benchmark money-market rate up by the most since July.

The monetary authority supplied funds on a short-term basis, according to two people with direct knowledge of the matter who asked not to be identified. Some 50 billion yuan ($8.2 billion) was offered using Short-term Liquidity Operations, Market News International reported earlier, citing market sources. Eleven companies are due to sell shares for the first time next week and Australia & New Zealand Banking Group Ltd. estimates the sales will lock up at least 1 trillion yuan.

“The PBOC clearly has the capacity to bring down money-market rates,” said Suan Teck Kin, an economist at United Overseas Bank Ltd. In Singapore. “But right now, I don’t see the short-term rates coming off significantly as demand for cash is strong in relation to IPOs.”

The seven-day repurchase rate, a gauge of cash availability in the banking system, rose as much as 322 basis points, or 3.22 percentage point, to 6.50 percent, data from the National Interbank Funding Center show. That’s the biggest intra-day jump in eight months. A weighted average rate extended gains after the PBOC injected cash, climbing 37 basis points to 3.66 percent in Shanghai, the highest close since August. The Shanghai Composite Index of shares rallied 1.4 percent.

The central bank will provide liquidity support through multiple monetary policy tools when necessary, according to a statement released today on its microblog. IPOs contributed to recent volatility in money markets and the banking system has ample funds, the PBOC said.

Bonds Steady

Longer-term interest rates were little changed today. One-year swaps, the fixed payment needed to receive the floating seven-day repo rate, fell one basis point, or 0.01 percentage point, to 3.13 percent, according to data compiled by Bloomberg. The yield on government bonds due September 2024 was steady at 3.7 percent.

Policy makers are supplying cash on a selective basis to hold down borrowing costs, while refraining from broad-based interest-rate or reserve-requirement cuts, as they seek to tackle an economic slowdown and prevent debt rising to unsustainable levels. Data this week showed a preliminary manufacturing gauge dropped to a six-month low in November and analysts predict China’s gross domestic product will rise this year at the slowest pace in more than two decades.

‘Serious Problems’

The central bank injected 769.5 billion yuan into the banking system during the September-October period using a newly-created Medium-term Lending Facility that supplied three-month loans. Even so, bank lending fell to 548.3 billion yuan in October from 857.2 billion yuan the previous month.

“There are serious problems with China’s monetary policy transmission mechanism,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “The central banks have pumped money into the banking system, but banks don’t have any intention to lend. Monetary policies are ineffective in bolstering activities on the ground.”

Sustained weakness in the economy will leave the PBOC with few options other than reductions in interest rates or banks’ reserve-requirement ratios, he said.

The PBOC said in January 2013 that it would use SLOs as an extra tool to manage the cash supply, adding that these would mainly involve the use of repurchase agreements and reverse repos with maturities of fewer than seven days. It named 12 banks, including Industrial & Commercial Bank of China Ltd. and Bank of China Ltd., as participants in the operations, which supplement regular open-market auctions held each Tuesday and Thursday.

Today’s reported use of the lending facility comes after trading in the money market was extended by 30 minutes to 5 p.m. yesterday.

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