Central Bank Injects Funds to Ease Cash Squeeze

China's central bank on Tuesday injected liquidity into markets through six-day reverse repurchase agreements (repos) in an effort to meet rising cash demand during the upcoming week-long holiday.

The People's Bank of China (PBOC) added 88 billion yuan (US$14.31 billion) in funds into the banking system through reverse repos, a process in which central banks purchase securities from banks with an agreement to resell them at future dates.

The six-day reverse repo was priced to yield 3.9 percent, according to a statement on the PBOC website.

It was the largest single-day liquidity injection since Feb 7, when the country's central bank flooded the interbank market with 410 billion yuan in its open market operations before the Lunar New Year holiday.

Analysts said the central bank's move is aimed to ease concerns about a quarter-end cash crunch like the one that rocked the country's financial markets in late June.

In Tuesday's interbank market, the overnight Shanghai Interbank Offered Rate (Shibor), which measures the cost at which Chinese banks lend to one other, dropped by 20.06 basis points to 3.61 percent. The rate surged to a record high of over 13 percent in June.

China's financial markets and business operations will be closed from Oct 1 to 7 for the National Day holiday, when a surge in cash demand is expected because of travel expenses and holiday shopping.

The holiday demand adds to the already rising cash demand related to the end of the fiscal quarter, when banks usually hoard cash to meet capital requirements and payments on maturing wealth management products.