Central bank to ease liquidity squeeze

The People's Bank of China (PBOC), or the central bank, stepped up its intervention in the money market on Thursday by injecting 183 billion yuan (US$ 28.97 billion) in new cash into banks ahead of the Spring Festival holiday season.

After auctioning 183 billion yuan in reverse repurchase agreements (repos), the PBOC released a total 352 billion yuan of liquidity into the banking system this week for the Spring Festival holiday, which starts on Sunday.

With another 126 billion yuan in bills and repos due in January, the amount of cash the PBOC released back to lenders through its open market operations is equivalent to lowering banks' reserve requirement ratio (RRR) by 0.5 percentage points.

"Historically, January sees substantial demand, with people withdrawing cash for holidays and banks making loans at the beginning of the year," said Zhao Xijun, a professor of finance and economics at the People's University of China.

The first month of 2012 marks the three-day New Year holiday and the weeklong Spring Festival holiday, during which time Chinese people withdraw large amounts of money from banks for celebrations and companies pay year-end bonuses.

The PBOC's liquidity injection brought down short-term borrowing costs between Chinese banks, as suggested by Thursday's interbank market yields.

The Shanghai Interbank Offered Rates (Shibor), which measure the cost of interbank borrowing as a key barometer of liquidity, fell sharply after reaching new highs on Wednesday.

The overnight Shibor fell 1.66 percentage points to 6.49 percent after hitting an all-time high of 8.16 percent on Wednesday. The one-week Shibor weakened by 1.88 percentage points to 6.01 percent, while the two-week Shibor plunged by 220.16 basis points to 6.60 percent.

Yang Yang, an investment advisor with Guosen Securities, said the PBOC's increased reverse repo operations have once again heightened market expectations for an interest rate cut or a drop in the RRR for banks.

"A cut in the interest rate and the RRR is possible after the festival," Yang said, adding that these expectations have boosted equity markets, with a rally of more than 4 percent over two consecutive days.