PBOC targets risky lending

China's central bank pledged over the weekend to continue a stable monetary policy this year and urged commercial banks to better manage their liquidity and asset liabilities.

China's interbank lending market experienced three major cash squeezes during the past year. Despite the central bank's injection of fresh funds into the market, the liquidity shortage will continue in the near future without major policy adjustment, analysts said.

In a quarterly report released on Saturday, the People's Bank of China (PBOC). the country's central bank, said it would tighten its supervision of risky lending in areas such as the property market, industries suffering from overcapacity and local government financing vehicles (LGFV).

According to the report, China will continue to carry out sound monetary policy this year, while making it more forward-looking, coordinated and target-oriented. It will also implement policy fine-tuning in a timely and appropriate manner.

The central bank vowed to use a mix of tools including open market operations, standing lending facility and short-term liquidity operations to adjust the liquidity of the banking system and to increase its communications with the market, the report said.

The central bank "will guide commercial banks to strengthen liquidity and asset liability management, make proper arrangements for liquidity at particular times, make appropriate plans for total asset liabilities and maturity structures, and boost the management capacity of liquidity risks," the PBOC said.

The latest cash squeeze occurred late last month, when the benchmark seven-day repurchase (repo) rate soared to 6.6 percent on January 20, forcing the PBOC to inject 255 billion yuan ($42.1 billion) of fresh funds into the market.

The seven-day repo rate hit 28 percent on June 20, 2013, marking one of the country's most severe cash crunches, and surged again to nearly 10 percent in late December.

Li Bo, a Shanghai-based chief investment consultant at GF Securities, told the Global Times Sunday that the cash shortage will continue in 2014, since the central bank has not introduced any fundamental measures.

"The commercial banks cannot be 'guided' to solve the problem," Li said. "The PBOC needs to adjust the current tight-oriented monetary policy or to introduce other policies to boost the economy."

Online financial products, such as e-commerce giant Alibaba Group's Yu'ebao, have also been stealing customers from commercial banks using higher yields than bank deposits return, Li said.

Zhu Lixu, a Shanghai-based analyst with Xiangcai Securities, told the Global Times Sunday that China's mounting local government debt is fueling the cash shortage.

According to the National Audit Office, China's total local government debt reached 17.9 trillion yuan in June last year, up 67 percent from the end of 2010.

"The central bank is trying to ease the problem on the outside, instead of fundamentally solving the problem," he said.

"If the commercial banks do not satisfy the cash demand from local real estate development and LGFVs, other financial institutions, probably in the shadow banking system, will do that job. Thus, the market will continue to be short on cash," he added.

The report said that the PBOC plans to use comprehensive measures to ensure the stability of the financial sector in order to prevent systematic or regional financial risks from happening.

China will further push for interest rate liberalization and improve its yuan exchange rate formation mechanism in 2014, the report said, and it will as well nurture financial institutions ability to price-set on their own.

"[China] will increase the market's role in deciding the exchange rate and raise the elasticity of the rate's two-way fluctuation," the PBOC said.

While the central bank might widen the rate's spectrum of fluctuation, Li said, it will not drop its power to set the daily starting point of yuan trade in the near future. Therefore, the formation mechanism of the yuan exchange rate will not be truly "free" any time soon, he added.

China will also offer more financial resources for small and micro businesses, the report said, and it will guide financial institutions to provide more credit support to areas that fall within the "three rural issues" - agriculture, farmers and the countryside.