PBOC Said to Inject Funds After Missed Interbank Payments

(Bloomberg) -- China's central bank injected hundreds of billions of yuan into the financial system after some smaller lenders failed to make debt payments in the interbank market, according to people familiar with the matter.

Tuesday's injections followed missed interbank payments on Monday, the people said, asking not to be identified because the matter isn't public. The institutions that missed payments included rural commercial banks, according to three traders who asked not to be identified. One said a borrower failed to repay an overnight repo of less than 50 million yuan ($7.3 million).

China's smaller lenders faced tighter liquidity this week as benchmark money market rates climbed to the highest level since April 2015, reflecting a mix of technical factors including cash hoarding for quarter-end regulatory checks. By letting borrowing costs rise, the People's Bank of China may have been sending a warning to over-leveraged lenders, according to Banco Bilbao Vizcaya Argentaria SA. The central bank has been known to allow short-term jumps in money market rates to discourage excessive borrowing.

“The PBOC wants to warn the smaller lenders not to play the leverage game excessively,” said Xia Le, chief economist at BBVA in Hong Kong. “It's a tug of war between the central bank and the financial institutions.”

The PBOC declined to comment on the operations.

The injections occurred separately from the central bank's daily open-market operations, which added 30 billion yuan to the financial system on Tuesday morning. The PBOC had drained funds for 16 consecutive days through March 16, when it also increased interest rates in the operations for the second time this year.

Read more: A QuickTake explainer on China's debt challenge

“The central bank is adopting a policy to boost costs while ensuring cash supply,” said Qin Han, a fixed-income analyst at Guotai Junan Securities Co. “So even after the seasonal shock, it'd be difficult to see repo rates falling significantly.” 

While Chinese money market rates rose on Tuesday, the nation's financial markets took news of the missed interbank payments in their stride. The Shanghai Composite Index added 0.3 percent, while the yuan gained 0.2 percent against the dollar. Futures on the FTSE China A50 Index in Singapore retreated 0.4 percent in early Wednesday trading as global equities declined.

At 3.09 percent, the benchmark seven-day repurchase rate is still well below the record 12.45 percent reached in June 2013. Back then, the PBOC refrained from adding funds amid tight conditions, with Shang Fulin, then-chairman of the China Banking Regulatory Commission, saying that the cash crunch had exposed deficiencies in commercial banks' liquidity management and their business structures.

Financial Fragility

China's central bank has been driving up the cost of money since August last year, when it started injecting longer-term funds that carry higher interest rates. The manager of the nation's biggest money-market fund warned in January that the nation would face more frequent liquidity shocks this year, after surging interbank rates in December spurred the nation's biggest bond rout in six years.

The PBOC's cat-and-mouse game with lenders is part of the central bank's attempt to wean the country off years of easy money while avoiding a financial crisis. For Xia, it's still too early to tell whether policy makers will succeed.

“What's happening this week exposed the fragility of the financial system,” he said. “While its techniques have become more sophisticated since June 2013, the policy effectiveness needs to be seen.”

--With assistance from Jing Zhao Yuling Yang and Jeff Kearns

To contact Bloomberg News staff for this story: Steven Yang in Beijing at kyang74@bloomberg.net, Helen Sun in Shanghai at hsun30@bloomberg.net.

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Jessica Zhou at jzhou75@bloomberg.net, Michael Patterson

With assistance from Steven Yang, Helen Sun