the headquarters of the People's Bank of China (PBOC)
A staff member walks in front of the headquarters of the People's Bank of China (PBOC)Reuters

China's central bank has injected liquidity into its money market in order to ease concerns about a cash squeeze after short-term interest rates rose to a record high.

The People's Bank of China (PBOC) has conducted the so-called short-term liquidity operation (SLO), after the seven-day repo rate rose to 9.8%, the highest level since June's cash crunch. The central bank generally conducts such operations with individual lenders behind closed doors.

The central bank confirmed its recent move but did not give details of the exact date or how much cash it had injected. Nevertheless, some media reports say that the bank pumped in 200bn yuan ($33bn, £20bn, €24bn).

In addition to the cash injection, the PBOC extended trading in the country's interbank market by 30 minutes on 19 December with a view to giving financial institutions additional time to line up funds.

There was a rumour that two commercial banks did not settle their payments, forcing the central bank to extend the trading.

Earlier, the central bank allowed such an extension during the June cash crunch, when investors around the world were alarmed about the potential for a financial crisis in China.

Unusual Conditions

"It reflects that the PBoC intends to calm down market fears as the 7-day repo was close to double digit again," Liu Li-Gang, economist at ANZ bank, said in a note.

"On the other hand, the central bank appears to understand that the market might be faced with some unusual conditions. We believe the central bank's intervention is necessary and timely."

The central bank, however, refrained from conducting reverse repos for almost two weeks, as it expects the large treasury funds injection from the ministry of finance in the second half of December to significantly relax the market liquidity.

In reverse repos, the central bank accepts deposits from other lenders at a specific rate. A decrease in reverse repo rate will increase the money supply in a country and vice versa.

Need for Reforms

Economists were of the view that the central bank should change its policies to adapt itself to such sudden shocks in the financial markets.

"Although the PBoC has attempted to act decisively yesterday, in our view, there is a need for the central bank to review its current monetary stance in order to meet the liquidity requirement towards the year end," said Liu.

"While the SLO could be considered a tool to tackle the emergency needs of individual banks, the PBOC can start to conduct reverse repo again in order to lower the market interest rate."