Chinese Cash Crunch: The New Normal

by on January 20, 2014 8:26 pm BST

Chinese repurchase rates are increasing again in the midst of another cash crunch with banks hungry for more spoon fed credit. The People’s Bank of China (PBOC) has backed itself into a corner by saying it will no longer support the increasing growth in speculation and debt by handing out free money, yet it continues to inject new capital to avoid a potential credit crisis.

The PBOC is notoriously silent on financial and economic matters that most banks communicate when time calls for it. Analysts believe it was the inability to effectively communicate to the market participants during the initial cash crunch in June – the market has punished the Federal Reserve, to some extent, for the same confusion. According to a memo from China International Capital Corp. (CICC), “the central bank’s operations are just a flexible response to the liquidity situation. They weren’t planning to inject funds.”

The Chinese central bank said it will inject more capital into the financial system at a regularly scheduled open market operations, which is almost unheard of for central banks to announce such measures openly prior to taking action. The PBOC will inject up to $19.8 billion, or 120 billion yuan, into smaller banks. Smaller banks will benefit because they have restricted access to customer deposits.

It is expected that another crunch will happen at the end of the month as banks try to tidy-up their books before the Lunar New Year. On June 20, 2013, the seven-day repurchase rate hit 28 percent, highest on record.