Will there be constant volatilities of China’s interbank rates following the latest PBOC intervention?

This article is a follow-up report on the ongoing cash crunch happening in China, and was discussed throughout my previous articles relating to the topic. According to a Bloomberg.com news article published on June 21, 2013, it was reported that there was apparently an injection of cash liquidity overnight on June 20, 2013 to the tune of approximately 50.0 billion Chinese Yuan (USD 8.2 billion) into the Chinese financial system through short-term liquidity operations. This news was disclosed during the early Asian trading hours on June 20, citing the source of the news was from Mr. Hao Hong, chief strategist at Bank of Communications Co. in Hong Kong, and a frequent guest commentator for Bloomberg Television. Bloomberg has approached one of the Peoples’ Bank of China (PBOC) press officials to confirm the cash injection, but was quoted that he was unaware of the matter, and requesting for anonymity in order to conform to the official bank policies.

The latest Bloomberg news came on the heels of my previous articles that discussed about the sudden spike in the seven-day repurchase (Repo) rates, which has climbed to approximately 14.0 percent on June 20, 2013 from 7.0 to 8.0 percent early in the week, while the Shanghai Interbank Offered Rate (SHIBOR) has climbed to approximately an all-time high of  5.1 percent on the same day. The sudden moves of interbank rates have caused much damage to China’s financial system due to the shortage of liquidity, and fears among banks to loan money overnight to each other. Some financial observers have compared to a similar Lehman-type banking collapse which could happen in China if the PBOC does not intervene fast enough to ease off credit. The question now is whether China has just averted a near banking collapse with the latest USD 8.2 billion cash injection, or will there be more rounds of interbank rate hikes, constant fear among banks to provide overnight loans, and shortage of liquidity which could cause massive cash crunch that neither the Chinese Central Government, nor the PBOC is able to cope with the tide of banking runs we have seen recently happening in Cyprus, and other troubled European countries.

According to the June 21 Bloomberg.com news article, the move was prompted by policy makers in their bid to tighten funding in order to “punish” some small banks, which have been using the ‘shadow’ banking system to skirt the official regulations, in order to take advantage of the low interbank rates in exchange for higher-yielding fixed income instruments. However, by sitting on the sidelines and watching the repo rates spiking each day are quite a risky and ‘reckless’ move, in my opinion, as I believe the role of the Central Bank is to shore up liquidity, create the conditions for an orderly conduct of the financial system etc., as opposed to letting the market forces to dictate the volatile swings in the repo rates, and not intervening promptly to calm investors.

On the details of the cash injection which was reportedly to have taken place on June 20, the process undertaken by PBOC involved a cash injection of approximately USD 8.2 trillion to a local financial institution, which was unnamed at the time of the publication of the Bloomberg news story, but could be traced via the publication of the daily SHIBOR rate reports which are normally released at approximately 1130 hrs (Hong Kong/Singapore time). Several banks other than the unnamed lender have reportedly requested PBOC for additional injections of overnight liquidity. Bloomberg tried to confirm with the bank officials, including the Bank of China (BOC), which disclosed in their email replies saying that they were fulfilling their payment obligations as of June 20. Other Chinese banks declined to comment about the supposedly latest cash injection from PBOC.

As of Asian trading hours on June 21, 2013, the one-day repurchase (Repo) rate fell to approximately 384.0 basis points (bps) or 3.84 percentage points, to 7.9 percent as of 0933 hrs (Hong Kong/Singapore time), according to a weighted average compiled by the National Interbank Funding Centre. This represents the biggest fall since 2007, while the seven-day repo rate fell approximately 351.0 bps to 8.1 percent, from the 14.0 percent levels cited earlier in the paragraph on June 20.

With the latest move by the PBOC, coupled with the current slowdown of the Chinese economy as shown by the latest flash June 2013 HSBC Purchasing Managers Index (PMI) number which touched a low of 48.3, there could be several months of uncertainties as liquidity continues to remain tight in the coming months. The new Chinese leadership has opted for less government intervention through infrastructure spending, and have curbed the rate of speculative home buying across many of the Chinese provinces. China’s financial system is still not yet fully opened up, and activities such as the latest round of intervention to ease liquidity by the central bank authorities are not promptly reported through official or news channels. Such market surprises could do more harm than good, as investors are naturally not comfortable with market uncertainties, and are mostly risk-averse in general. If China were to establish itself as a world financial hub, I believe that more efforts have to be done on the part of the new Chinese government to convince investors that the country is committed to improve transparency, corporate governance, protect shareholder interests, root out any signs of corruption, misbehaviour among corporate executives, and impropriety. Although such reforms could take a while, but if there is a strong advocacy among investors to push for tougher actions against alleged corporate crimes committed by corrupt officials and businessmen, I believe that it goes a long way to eventually gain investor confidence, and signs of normalcy could return to the cash markets, rather than the rapid swings seen recently in the interbank rates.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc