China’s Central Bank Floods System with Record Cash

China’s central bank flushes her financial system with record cash

From Businessweek/Bloomberg,

China’s interest-rate swaps fell from a three-month high as the central bank injected record funds into the financial system to ease a cash crunch.

The six-month contract, the fixed cost to receive the seven-day repurchase rate, fell five basis points, or 0.05 percentage point, to 3.25 percent as of 10:27 a.m. in Shanghai, according to data compiled by Bloomberg. It reached 3.31 percent yesterday, the highest since May 11. The seven-day repo rate, a gauge of interbank funding availability, increased 10 basis points to 3.72 percent, a weighted average shows.

The People’s Bank of China conducted 220 billion yuan ($34.6 billion) of reverse-repurchase operations, the most in a single day, according to a trader at a primary dealer required to bid at the auctions. The government may introduce new policies to boost consumers’ borrowing and spending this year, the Economic Information Daily reported today, citing an unidentified person.

“This unusually large volume points to the central bank’s concern about the elevated level of money-market rates,” Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong, wrote in a note to clients today. “We still expect a reserve-requirement cut, but the impact of this large open- market operation should be lower interest-rate swaps at the short end.”

The central bank last lowered banks’ reserve requirements in May and cut benchmark interest rates in June and July to support the economy. Gross domestic product increased 7.6 percent from a year earlier in the second quarter, the least since the first quarter of 2009, official figures show. Economic growth will slow to a 13-year low of 8.2 percent in 2012, based on the median estimate in a Bloomberg survey.

By the way the PBOC acted, China’s economy has been suffering more than just a slowdown. Yet this, perhaps, may be a precursor to bigger interventions.

The Shanghai index closed modestly higher today. Gold prices has so far responded positively.