Cash Crunch Returns: Trading Defaults Force PBoC to Flood Market With Liquidity

Some institutions and traders were begging for capital after 4:30 PM on Monday, unable to meet financing obligations. One ag trader said, "Today we borrowed from morning to night, until after 5 PM, there were a lot of small institutions that failed to meet their obligations, I thought the interbank market would delay closing."

21st Century Herald reports several large banks were borrowing in the interbank market, including Bank of China, Construction Bank and Postal Savings. "National banks didn't give much money, Postal Savings actually [lent] out some money," said the trader.

"Of course, the end of quarter MPA assessment has some bearing, but I think there is a greater relationship with the central bank deleveraging policy." A Huadong Rural Commercial Bank financial market employee told 21st Century: "late last year is also very tight money, everyone said the past year is good, but in fact into this year capital is still tight. Traders believe they can wait until four o'clock and money will naturally be released from the big banks, but today there is none."

The central bank began to inject liquidity through open market operations. Today, the central bank injected 30 billion, yesterday it injected 40 billion.

iFeng: 媒体称央行向市场注入数千亿元流动性

Is China going to be able to inject enough money at all the right moments to avoid a wave of defaults? And if they can do it, how much money are we talking about when a minor funding gap in the market triggers a 70 billion yuan release of capital? The numbers start adding up if this is a permanent fixture of "neutral" monetary policy and deleveraging.

Related: China's money rates surge on concerns about PBOC risk checks
SHANGHAI, March 21 Short-term interest rates in China surged on Tuesday as cash conditions tightened on worries the central bank's quarterly risk assessment at the end of this month would restrict lending in the interbank market.

The benchmark seven-day repo rate traded in the interbank market, considered a key indicator of general liquidity in China, opened at 2.45 percent and jumped to a high of 9.0 percent in morning trade, its highest since January 2014.

By midday, the volume-weighted average rate was standing at 2.6939 percent, around 23 basis points lower than the previous close but still near the near two-year high of 2.9298 percent hit last Friday.

Traders and analysts say liquidity tightness is driven by worries the People's Bank of China's quarterly Macro Prudential Assessment (MPA) at the end of this month could sway big banks away from lending cash to smaller ones.

"The last two weeks of March should be a period of intense volatility with both the MPA and quarter-end cash demand," Guotai Junan Securities wrote in a note.
The cash crunch is back.

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