China injects liquidity ahead of holiday

China's central bank injected short-term liquidity into the country's large commercial banks on Monday to ensure the stability of the country's monetary market ahead of the Spring Festival.

The People's Bank of China (PBOC) said in a posting on Sina Weibo, Chinese version of Twitter, that it did so through Standing Lending Facility (SLF).

SLF is a tool created by the PBOC in early 2013 to provide a large amount of funding to banks when they face a liquidity squeeze and are unable to get sufficient financing from the interbank market.

The PBOC did not specify the exact amount of the liquidity injection, but added it will continue to provide short-term liquidity support via reverse repurchase (repo) on Tuesday.

The central bank has not injected funds through reverse repos since December 24, 2013.

It also urged financial institutions to strengthen liquidity and asset management to safeguard monetary market stability before the Spring Festival, which falls on Jan. 31 this year.

The Spring Festival, or Chinese Lunar New Year, is the country's most important traditional holiday for family reunions.

Ahead of the holiday, commercial banks usually have to increase cash supply to meet the needs of surging consumption around the holiday, which tightens up their liquidity.

As of Monday, the PBOC has started pilots of SLF in 10 regions, including Beijing, provinces of Jiangsu, Shandong, Guangdong and Zhejiang, in which PBOC's local branches will offer short-term liquidity to qualified small and medium-sized banks, a new PBOC statement showed.

The move aims to improve the management of those banks' liquidity and ensure market stability, and it offers a new way for the central bank to provide liquidity support for small and medium-sized banks.

The experiments cover rural and urban commercial banks, ruraal cooperative banks and rural credit cooperatives, the statement said.

The SLF loans in the pilots mature in 1, 7 or 14 days and require qualified mortgages, including treasury bonds, central bank bills, as well as bonds issued by China Development Bank, policy banks and companies with high credit rankings.

Analysts believe the central banks latest move is closely related to recent hikes in interbank interest rates.

The Shanghai Interbank Offered Rate (SHIBOR) seven-day rate, a gauge of interbank borrowing costs, surged 155.3 basic points to 6.3290 percent on Monday.

The seven-day rate has increased for four consecutive working days after Jan. 15, arousing fresh concerns about a new round of liquidity crunch at the end of the month. Yang Weijiao, an analyst with Lianxun Securities, said the interest rate rise is within market anticipations, as cash supply surge ahead of the Spring Festival and banks are required to hand in reserves on the 15th day of a month.

At present, the reserve requirement ratio for large commercial banks is 20 percent, while that for small and medium-sized banks is 16.5 percent. The PBOC has not adjusted the ratio since May 2012.