PBOC uses 7-day repo after a year

China's central bank yesterday injected money in banks using a short-term tool it hasn’t employed in a year to address a seasonal cash squeeze amid a capital outflow.

But the injection was offset by demand for money as short-term funding costs continued to rise yesterday.

The People's Bank of China used seven-day reverse repurchase agreement for the first time since January 2014 to inject 50 billion yuan (US$8.05 billion) in the banking system, the central bank said in a statement yesterday.

The funds will be withdrawn from the banks next Thursday as the repo matures.

Economists said the PBOC is resuming the repo tool to address a liquidity crunch due to a decline in inflow of foreign capital, frequent initial public offerings on the stock market, and an increasing need for money ahead of the Chinese New Year holiday that will start on February 18.

"Historically speaking, every resumption of reserve repurchase is related to declining funds stemming from foreign currency purchases," China International Capital Corp said in a report yesterday.

"Short-term liquidity has been tight due to various factors, and a cooling economic growth and inflation allow policy-makers greater room to ease monetary policies."

Speculation abounds that a new batch of IPOs will be launched around the end of January, creating more demand for short-term funds.

The short-term money injection came a day after the PBOC confirmed it has extended a 269.5 billion yuan three-month loan to lenders and added a further 50 billion yuan in medium-term lending to ease money supply ahead of the holiday.

But the injection did not cut borrowing costs yesterday as the seven-day repo rate, a gauge of interbank funding cost, rose to a two-week high of 4.13 percent — seen as stressful — in Shanghai based on a weighted average from the National Interbank Funding Center.

The rate increased 21 basis points on Wednesday, the most since last month.

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