China’s cash squeeze showed first signs of easing with short term rates retreating amid the central bank initiating steps to each the cash shortage, according to The Wall Street Journal.

China Cash Squeese

China’s short term interest rates peaked recently to a record high. Some analysts feel the People’s Bank of China’s recent initiatives may not be adequate as the banks start raising money to meet their urgent quarter-end reserve requirement ratio.

On Friday, China’s central bank, People’s Bank of China, asked lending banks to release more funds to enhance liquidity in the system.

People’s Bank of China infused over 50 billion yuan ($8.2 billion) into the economy on Thursday, as China’s benchmark rate Shanghai Interbank Offered Rate (SHIBOR) spiked overnight to record high of 13.44 percent yesterday from Wednesday’s 7.66 percent.

Though PBOC supplied cash to only one lender through “targeted liquidity operations”, according to some reports more Chinese banks are in talks with the central bank to obtain financing.

The easing measures announced by the central bank have brought some relief to China’s battered stock market, with the benchmark Shanghai Composite Index retreating from initial losses to end with a marginal loss of 0.5 percent.

Persistent Cash Squeeze in China

Apart from the quarter-end obligations towards reserve-requirement ratios, some banks are confronted with inability to pay back in full the maturing wealth-management products. Fitch Ratings estimates about 1.5 trillion yuan ($245 billion) would be due before this month end. In addition, the central bank has stopped infusing cash through its regular open-market operations this week.

Chinese yuan also turned weaker today amid the central bank pointing to a weaker currency through its daily reference rate.

Eye on Long Term Risks

Shen Hong of The Wall Street Journal quoted analysts who feel China’s new leaders appear to endure the short-term pain to prevent long-term financial risks.

Chinese banks’ asset quality also posed concern in recent years, in the aftermath of a government-engineered lending binge in 2009 to extend loans to low-yielding or mammoth infrastructure projects.

Some analysts feel if the central bank continues to sell short-term bills to absorb liquidity from the financial system, the cash squeeze would only persist.

Hence, some analysts feel the recent easing measures announced by the central bank would only be of temporary nature, turning short-term interest rate more volatile.