Economy

China's money squeeze remains despite PBOC net injections

(Xinhua)
Updated: 2010-06-25 16:42

BEIJING - Even as the People's Bank of China (PBOC), the central bank, released 201 billion yuan ($29.56 billion) into the market this week via its open market operations, money supply remained tight in the interbank market, traders and analysts said.

In this week's last open market operation on Thursday, the PBOC auctioned 5 billion yuan worth of three-month bills at a yield of 1.5704 percent, resulting in a net injection of 201 billion yuan into the money market for the week.

It was the fifth straight week that the PBOC released liquidity into the market to ease tight money supply in the interbank market.

The move by the PBOC this week brought the total cash released into the money market to 716 billion yuan since May 24.

Market analysts say the net injections by the central bank should not be interpreted as a change in monetary policy.

Since mid-May, China's banks have faced a short-term money squeeze after the PBOC introduced a series of tightening measures to cool the booming property sector.

"Capital is still too hot to obtain," said a trader working for the capital operation department at a State-owned bank. "All the Big Four lenders and some smaller banks are borrowing from the market. Some banks had to dump the bonds they hold to fill their capital inadequacy."

The tight money supply situation was also reflected in the rising interest rates of Treasury bonds.

The yield of 10-year book-entry Treasury bonds auctioned by the Ministry of Finance on Wednesday climbed to a two-month high of 3.41 percent.

Rising bond yields usually reflect reduced demand for them or cash hoarding.

Related readings:  PBOC's 190b yuan net injection indicates tight liquidity  Central bank urges flexibility in policies  China's central bank injects 166b yuan into market this week  Central bank to issue 120b yuan 3-year bills

Some commercial banks, which are under great pressure to absorb deposits to meet the regulator's loan-to-deposit requirement, also added to the money squeeze in the market, said He Yifeng, a senior research fellow with Hongyuan Securities.

Huang Wentao, an analyst with China Securities Research, said a number of factors, including the drop in monetary base due to sharp decrease of funds outstanding for foreign exchange, some banks's increasing demand for cash to distribute bonus and the initial public offering by the Agricultural Bank of China, led to the liquidity squeeze in the market.

"The tight money condition will not improve until mid-July," Huang said.

The central bank would probably continue to release liquidity into the market via its open market operations in the next few weeks, he added.