September 25, 2012 / 5:02 AM / 7 years ago

China central bank makes record cash injection to ease liquidity

SHANGHAI (Reuters) - China’s central bank injected a record amount of cash on Tuesday but the move was shrugged off by money markets, with a severe pre-holiday liquidity squeeze pushing rates higher as banks hoard cash to meet holiday demand and quarter-end regulatory checks.

An employee counts Chinese 100 yuan banknotes at a branch of Industrial and Commercial Bank of China in Huaibei, Anhui province, July 6, 2012. REUTERS/Stringer

The benchmark short-term borrowing rate hit a seven-month high, despite the central bank’s injection of 290 billion yuan ($45.96 billion) into the market via reverse bond repurchase agreements - the largest single day gross cash injection on record.

Maturing bills, repos and reverse repos are set to effect a net drain of 105 billion yuan this week.

When deducted from today’s injection, it means that the central bank is already set to inject at least 185 billion yuan for the week, but it is likely to inject even more on Thursday, traders said.

In another indication of the current liquidity squeeze, the central bank auctioned 40 billion yuan of six-month finance ministry deposits at a rate of 4.32 percent on Tuesday, well above the central bank’s benchmark six-month deposit rate of 2.80 percent<CN/DBT>.

Money rates extended the rise that began at mid-month.

The benchmark weighted-average seven-day bond repurchase rate rose 19 basis points to 4.70 percent near midday. The 14-day repo rate rose to 4.83 percent from 4.72 percent.

But traders say that given the central bank’s apparent determination to relieve the squeeze, money rates have likely peaked.

The level of reverse repos is not unusual given the elevated demand for funds and the need to keep the market stable, a trader at a Chinese bank in Beijing said. A further injection at Thursday’s auction is also likely.

“Demand for funds will be big, so the amount of Thursday’s reverse repo should be huge,” he said.

The cash injection comes as banks are hoarding funds ahead of long holidays stretching through the first week of October and a regular reserve requirement ratio (RRR) payment due after the holiday period on Oct 8.

The latest cash injection mirrors the central bank’s action in January this year, when it injected 352 billion yuan to relieve a similar cash crunch ahead of the Spring Festival holiday.

The large injection also suggests that the central bank remains content to rely on open market operations to maintain interbank liquidity, and is unlikely to cut banks’ reserve ratio requirement (RRR) in the near term despite slowing economic growth.

(Reporting by Gabriel Wildau and Chen Yixin; Editing by Kim Coghill)

pete.sweeney@thomsonreuters.com; +86 21 6104 1777 / +86 158 0188 9934; Reuters Messaging: pete.sweeney.thomsonreuters.com@reuters.net

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