Fund crisis pulls repo rate to 2-year high

A liquidity squeeze yesterday drove interbank lending rate to a two-year high after China's central bank disappointed the market by not pumping in funds.

The seven-day repurchase rate, which measures interbank funding cost, increased 1.38 percentage points yesterday to 8.20 percent, a weighted average compiled by the National Interbank Funding Center. The repo rate touched 8.21 percent earlier, the highest since June 2011.

Money rates have been on a steep uptrend since mid-May but the People's Bank of China disappointed market hopes of a fund injection and instead withdrew 2 billion yuan from financial institutions on Tuesday by issuing bills.

The move indicated the monetary authorities' tight stance against the rising shadow banking business.

"The central bank is capable to boost liquidity through conducting reverse repurchase or a cut in the bank reserve requirement if it wants to," said Qu Hongbin, chief China economist with HSBC.

He said there is no need to "excessively worry" about the current situation.

Xiao Liqiang, a China Merchants Securities analyst, said the PBOC's "intentional control" on shadow banking activities will continue to cause liquidity crunch in some sectors.

Banks are under pressure to repay trillions of yuan to investors who bought wealth-management products by the end of June, the 21st Century Herald reported yesterday, citing a Fitch researcher.