By Winni Zhou and Andrew Galbraith
SHANGHAI (Reuters) - China's central bank made its biggest daily net fund injection into the banking system in more than four months on Wednesday, a move traders saw as an attempt to calm the money market after the rescue of a troubled bank.
The government announced its takeover of Baoshang Bank on Friday.
It was the first rescue of this kind that the government has launched since 1998, and comes amid mounting concern over rising corporate defaults, mounting debt and a slowing economy.
Worries that Baoshang's plight might herald wider problems among China's regional banks had driven money market rates higher, until the People's Bank of China (PBOC) delivered a mighty infusion of cash on Wednesday.
"Markets are quite concerned about whether the takeover itself suggests something is very wrong, whether there will be more such takeovers and whether China will experience some kind of credit squeeze," Lu Ting, chief China economist at Nomura in Hong Kong, said.
The PBOC injected a net 250 billion yuan (28.6 billion pounds) into the market for the day - the biggest net cash injection since Jan. 17. The PBOC has injected a net 400 billion yuan so far this week, putting it on track to be the biggest weekly amount since mid-January ahead of the Lunar New Year holiday, a time when the central bank traditionally boosts liquidity to meet increased demand for cash.
The central bank's open market operations on Wednesday involved 270 billion of seven-day reverse bond repurchase agreements, against just 20 billion yuan of expiring reverse repurchase agreements.
As a result of the infusion the benchmark seven-day repo, considered the best indicator of general liquidity in China, fell to 2.81% on Wednesday afternoon, having traded at 3.54% on Tuesday, the highest level since March 29.
In its daily statement, the PBOC stuck to routinely used terms to explain Wednesday's cash infusion, saying it was made in order to keep banking system liquidity "reasonably ample".
The central bank's liquidity operations so far this week "send a strong signal that the PBOC is ready to ensure ample liquidity for the market, amid fragile sentiment in the credit and bond market," said Frances Cheung, head of macro strategy for Asia at Westpac in Singapore.
"Given huge amounts of maturing medium-term lending facility (loans) and negotiable certificates of deposit in the next three months, the PBOC is likely to further step up its easing, and RRR cuts cannot be ruled out," she said, referring to banks' reserve requirement ratios.
The swap curve moved upward this week as market participants were actively seeking funds amid growing worries that Baoshang's takeover could herald a possible weakening of small banks' ability to access interbank funding.
The Financial News, a newspaper under the PBOC, reported late on Tuesday that the interbank repo business at Baoshang Bank was normal despite the sudden takeover.
Traders with direct knowledge of the matter told Reuters that Baoshang planned to resume issuance of negotiable certificates of deposit (NCDs) on Wednesday.
The market is poised to face more tests on liquidity in coming months.
A total of 1.8855 trillion yuan worth of medium-term lending facility (MLF) loans are set to mature in the June-August period, accounting for more than half of the outstanding such loans granted by PBOC to financial institutions.
Meanwhile, over 4.4 trillion yuan worth of NCDs are set to mature in the next three months, according to Refinitiv data.
ADVERTISEMENTCash conditions usually get tighter towards the end of June as financial institutions shore up their balance sheets to meet half-year regulatory requirements.
Memories of a deep cash crunch in June 2013 haunt market participants who suffered as the overnight repo rate leapt to a historic high of 30% in an event that roiled global markets.
Some market analysts said they were concerned any further easing by PBOC could hurt the already weakening yuan.
On Wednesday, the yield gap between Chinese and U.S. 10-year government bonds stood at 109 basis points, double the 54 basis points seen at the start of the year. A wider yield gap suggests a lower risk of capital outflows from China and less pressure on the yuan.
PBOC Governor Yi Gang described the yield gap as being in a "relatively comfortable range", the Financial News reported on Tuesday.
ADVERTISEMENT(Editing by John Ruwitch and Simon Cameron-Moore)
