As reported yesterday [8], following a surge in various short-term and money market rates in the aftermath of the Fed's taper announcement, the PBOC admitted after the close that it used Short-term Liquidity Obligations (SLO) to add funding to the market, and in doing so, bailing out money markets - the same product that nearly collapsed the financial system in the aftermath of Lehman.
The bank didn't specify when it added the funds but, in another direct echo of the June panic, the PBOC said it is prepared to add more. However, it seems the market was less the convinced, and despite an early plunge in the seven day repo rate by over 2%, it suddenly and rapidly reversed direction and instead blew out hitting a whopping 9%, the highest since the June near-crash of the Chinese banking sector.
[9]
The outcome: China said it injected another $50 billion to bailout and stabilize its money markets in what is increasingly looking like a replay of this summer's liquidity lock up. Perhaps the PBOC hinting at tapering at a time when the Fed is actually doing so is not the smart choice...
From the WSJ [10]:
China's central bank said it had injected over 300 billion yuan ($49.2 billion) into the nation's money markets over a three-day period as interbank interest rates surged to their highest levels since June.
The People's Bank of China said on its official Twitter-like weibo account that the banking system had current excess reserves of over CNY1.5 trillion and it called that level "relatively high."
The central bank said that it had injected the funds through its "short-term liquidity operations" and this was in response to the year-end market factors.
The interest rates banks charge each other for short-term loans jumped to 8.2%, the highest level since the June cash squeeze.
The stress in the banking system is starting to spread elsewhere, with stocks in Shanghai falling for a ninth straight day to the weakest level in four months while government bonds dropped, pushing the 10-yield up to near the highest in eight years.
The turmoil has been sparked by a scramble for funds by banks as they near the end of the year when they typically need extra cash to meet regulatory requirements as well as the demand for funds from companies.
The central bank also said reminded banks that they need to manage liquidity better.
As to what drove the rapid mood reversal, the Chinese market was hit early on with talk of a missed payment at a local Chinese bank. For now it has not been confirmed, and even if it was the PBOC is expected to never allow any government-backstopped bank to fail. Still, a few more days like the last two and the world may just find out how prepared for a bank failure a credit-stretched China really is.