China Central Bank downplayed fears of any cash crisis when it injected funds in the money market through open market operations on Tuesday for the first time since February. The interference by the central bank ends the fear of a cash crunch ahead of the month-end, after there was critical crunch in June that caused an alarming situation in the market.

Central bank

Investors and other market observers in different countries were keenly observing China’s interbank money market after the credit crunch hit in June, as an alarm against dicey lending princes.

Infuses liquidity through bonds

Chinese central bank never detailed of the motive behind the rate spike in June, keeping the traders guessing, and at the same time showing no intent to take any action. However, the scenario took a turn on Tuesday.

Central Bank took part in the open market operations for the first time since June 20 when it injected 17 billion Yuan through the issuance of seven day reverse bonds repurchase agreements.

Stock market appreciate the move

There has been a hike in the short term money rates in China over the last couple of weeks, which resulted in Chinese companies and banks reserving cash to pay better dividends and make their book look better, says a report from Reuters.

Stock markets surged following the news. The Shanghai Financials Index opened up 0.5 percent, China Merchants Bank Co., Ltd (SHA:600036) (HKG:3968) also opened with an up of 0.9 percent and China Minsheng Banking Corp Ltd (HKG:1988) (SHA:600016) was up by 0.3 percent in Shanghai.

China’s Central bank raises repo rate

Central bank of China has set the reverse repo rate at 4.4 percent, which is higher, compared to previous official rate of 3.35 percent. The high reverse repo rate will develop a higher platform for market rates and contracts to trade at.

According to a dealer of a state owned bank, the amount infused is less and official guidance rate is high, which suggests that the central bank wants to be definite about the liquidity of the market, and cash is comparatively expensive.

According to Wee-Khoon Chong, economist at Societe Generale in Hong Kong, “The (high rate) could also serve as a signal that the era of ultra loose and easy money is over and liquidity has to be appropriately priced.”

As per Reuters, money rates are showing signs of easing following the volume-weighted seven day repo contract opening down a bit. Interest rates for 1 day repos and 14-day repos also came down.