China's central bank took a sharp turn Tuesday evening, when it promised to inject money into a temporary liquidity shortage after rejecting banks' pleas for cash over the past two weeks.
The move has been interpreted as regulators' decision to end the credit crunch that caused interbank rates to surge to double digits and pounded the stock market into bearish territory.
The benchmark seven-day fixing repo dipped 78 base points to 7.22 percent as of 11:30 a.m. Wednesday, and the Shanghai Interbank Offered Rate (SHIBOR) overnight rate slid 18 base points to 5.55 percent at the same time. The SHIBOR overnight rate shot up to 25 percent last Thursday, when banks rushed to each other for money.
Another factor forcing the PBOC to dial back its tight liquidity stance was that the market reacted to regulators' call in a way that was the opposite of what regulators had hoped for. In desperate need of cash, banks rolled out massive wealth management products (WMPs) to attract deposits, and the yields of these investments grew much higher than previous ones, thus posing greater risks.
The central bank relented on its stance of a tightened credit crunch, as economists warned that a prolonged credit crunch would put the brakes on the economy, which is already facing mounting downward pressures.
Source: Xinhua
