Exclusive: China central bank seeks to reassure money markets after rate spike

Tue Oct 29, 2013 6:22am EDT
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By Weihao Cao and Kevin Yao

BEIJING (Reuters) - China's central bank sought to reassure money market traders that a spike in short-term interest rates does not signal a dramatic tightening of liquidity, sources said, in an apparent move to avoid a repeat of a credit panic that roiled markets in June.

The People's Bank of China also warned against "excessive leverage", or borrowing, that would leave banks overexposed to sudden spikes in demand for cash, said the sources, who attended a closed-door meeting between a PBOC official and traders from major financial institutions late last week.

China's short-term interest rates began rising sharply last week, leaving banks stretching for funds even as the central bank repeatedly declined to inject fresh cash.

The central bank official reassured traders that liquidity remained ample and the bank would keep its short-term monetary operations - which it uses to steer the country's money supply - stable this year, four sources who attended the meeting said.

The jump in rates came after official data showed startling rises in housing prices and increasing inflationary pressure aggravated by capital inflows, leading some economists to argue that Beijing was preparing to tighten money conditions to suck excess cash out of the system.

The sources, who included both primary dealers and liquidity strategists, said that the official, who is involved in the management of the country's short-term money supply, blamed the rate rise on institutions failing to adequately anticipate the impact upcoming tax payments would have on demand for cash in the interbank market. The official said that actual liquidity conditions were still accommodative.

The sources declined to give the official's name due to the sensitivity of relations with the regulator, and requested anonymity themselves because they were not authorized to speak to the press.

"The message from the PBOC is the same as last time: warning banks against building up too much leverage," said a money dealer at a foreign bank in Shanghai.   Continued...

A sign showing the entrance to an underway passage is seen outside the headquarters of the People's Bank of China, the central bank, in Beijing October 17, 2013. REUTERS/Kim Kyung-Hoon