PBOC offers interbank liquidity ahead of holiday

Move aimed at avoiding cash crunch as depositors withdraw money for Spring Festival spending

The central bank on Monday night expanded a new support tool to cover smaller financial institutions, days ahead of the Lunar New Year holiday, when interbank liquidity tends to run low as depositors withdraw cash.

Analysts believe the move marks the People's Bank of China's latest effort to avoid a repeat of the cash crunch that occurred last June, as well as providing greater liquidity to the nation's big lenders through a new tool unveiled on Monday when money market rates rose.

The so-called standing lending facility (SLF), a targeted liquidity operation launched last year in the wake of a cash crunch that saw money market rates soar to a staggering 30 percent, will be expanded to cover small and medium-sized financial institutions at selected sites in 10 cities and provinces, including Beijing, Guangdong and Shenzhen.

Funds will be offered with tenders ranging from overnight to seven and 14 days, using collateral such as government bonds, central bank bills and high-grade corporate bonds.

"We think these are significant steps by the PBOC. We believe these announcements suggest that the central bank is very concerned about potential liquidity risk in the interbank market leading into the Lunar New Year holiday period," said Nomura Securities Co Ltd in a research note on Tuesday.

In a statement posted on its website Monday, the PBOC said it will "employ multiple monetary policy tools, including the SLF" in providing liquidity support to local financial institutions and ensure that the money market runs smoothly in the runup to the Lunar New Year that kicks off on Jan 31.

The PBOC didn't specify how much it lent out through the SLF but promised that support will continue. On Tuesday, the PBOC announced it had poured 255 billion yuan into the money market through reverse repos.

It was the biggest one-day reverse repo operation in 11 months.

The PBOC had not injected funds through a reverse repurchase agreement since Dec 24.

But it marks a shift from last year, when the PBOC refrained from action until the last minute after money market rates hiked in June, October and December.

Nomura Securities wrote in the report that recent news of a potential trust default and the fact that the Shanghai stock market index dropped below 2,000 points on Monday suggested that market confidence is weak, which may also have put pressure on the government to take action and restore confidence.

But it added that the measures don't mean that the PBOC has relaxed its monetary policy stance, since the current GDP growth rate is still acceptable to the government.

It predicted that the government would continue to contain credit growth in the first quarter.