China is expected to undergo an increasingly tight liquidity squeeze over the following months, suggesting the country's central bank may take more measures to prevent a cash crunch.
One important barometer of liquidity in the domestic financial system, the Shanghai Interbank Offered Rate (Shibor) has been sending out signals that liquidity is getting tight. On Tuesday, the seven-day Shibor rose to 2.5375 percent, 1.25 basis points higher than the previous week's closing average rate, official data showed. And the three-month rate jumped to 3.2040 percent, its highest since October 2015.
Shibor is a daily reference rate that tracks the cost for banks to borrow among themselves. Rising rates signify that the domestic credit market is tightening due to short-term capital scarcity. The rate has risen for 44 consecutive trading days, its longest streak since 2010, the China Securities Journal reported on Tuesday.
Experts attributed the recent credit squeeze to increasing capital outflows and the falling yuan.
The People's Bank of China (PBOC), China's central bank, has been injecting money into the market to ease the pressure from capital outflows since October. On Tuesday, the central bank added a net of 165 billion yuan ($23.7 billion) through reverse repurchase agreements, or reverse repos, larger than Monday's net injection of 65 billion yuan.
Meanwhile, the medium-term lending facility (MLF) is also perceived as something the PBC can employ to manage liquidity in the banking system. On Friday, the PBC announced it will lend 394 billion yuan to 19 financial institutions via the MLF, after lending out 339 billion yuan a week earlier.
MLF loans could stabilized liquidity conditions, according to media reports.
However, the recent rounds of liquidity injections through reverse repos have aroused concerns.
"Such actions can help add liquidity in the market, but cannot lower borrowing costs," said Liu Dongliang, a senior analyst at China Merchants Bank.
Often, the size of the injections is not as large as expected, dampening market sentiment. "Sometimes we even see periodical reversals," Liu told the Global Times on Tuesday.
Liu called for more measures to boost liquidity.
Last week's total net injections via reverse repos reached to 250 billion yuan, reportedly marking a reversal from the previous week when the PBOC drained more than 500 billion yuan from the market.
Experts predicted that the tight liquidity squeeze would not change until February 2017.
A beginning of a new year would signal new rounds of foreign exchange purchases by individuals, which would put more pressure on China's yuan funds outstanding for foreign exchange, Liu said.
The latest PBOC data showed that yuan funds outstanding for foreign exchange continued to fall in November, declining 382.7 billion yuan from October to 22.26 trillion yuan.
