Weekly – China injects extra cash

by: Maritza Cabezas

Last week, the People’s bank of China pumped around RMB 17bn into the money market via seven day reverse repurchase agreements. This was a notorious difference in policy compared to the June liquidity squeeze, in which the central bank refused to inject any extra cash even after money rates spiked. Finally, during June’s liquidity crunch the central bank had no choice but to supply liquidity. The latest injection of liquidity, although more precautionary, showed rising costs. So far the central bank of China has shown a cautious monetary policy stance, while it continues to introduce reforms to the financial sector. Indeed, the removal of the floor on lending rates some days ago, should allow a more efficient allocation of capital over time. Lifting the floor on interest rates is critical in making banks more efficient. However, we don’t expect immediate impact on interest rates since banks are currently not fully making use of the floating band.