Cash crunch fans expectation on RRR cut

BEIJING -- China's market liquidity has turned surprisingly tight in recent days despite rate cuts in November, arousing speculation over a possible response from the central bank or even cuts in reserve requirement ratio (RRR) soon.

The Shanghai Interbank Offered Rate (Shibor), a key barometer of interbank lending cost, rose on every term on Wednesday, with one-month rates hitting a five-month high of 5.2770 percent and the three-month rate witnessing its largest daily increase of 17 bps in a year.

An anonymous investment manager in Beijing told Xinhua the market has been in a capital crunch since Tuesday, with few banks willing to lend, referring to the liquidity as "in an awful state".

Analysts attributed the situation to coming initial public offerings (IPO), maturity of the medium-term lending facility (MLF) and banks' strengthening efforts to attract deposits to meet the yearly goal.

The last round of IPOs from 12 companies in the year will start this week, receiving enthusiastic response from stock investors who have put aside big bucks for new shares amid the precious rising streak.

Guotai Junan Securities estimated capital worth up to 2.4 trillion yuan ($392.2 billion) has been frozen for the IPOs, marking record high, adding to the money shortage.

"But even if without the new share subscription, the monetary market will still suffer as the 500-billion-yuan MLF conducted by the People's Bank of China (PBOC) three months ago will become due soon," Chen Long, analyst with Bank of Dongguan said.

The MLF is believed to have something to do with the reluctance of large state-owned banks to lend in the interbank market.

Despite the circumstance, the central bank has yet shown intention to react as it continued to suspend reverse repurchase agreement (repo) on Tuesday.

However, experts pointed out there is a high possibility of an injection of liquidity from the central bank. A lowering of RRR is also likely.

Chen said the PBOC will definitely carry out measures to inject money in the short term, although a heated stock market, depreciation of the yuan and outflow of hot money has restrained strong measures.

As the money crunch continues, reverse repos and RRR cuts will be increasingly probable, Chen said.

His views were shared by Xu Gao, chief economist with Everbright Securities, who said tight liquidity has caused funding costs to run high, contradicting central bank's intention to reduce cost of financing for real economy.

Market speculation has run wild after the PBOC announced an interest rate cut on Nov. 21, with investors betting the bank will conduct more loosening measures, reducing the interest rate again or cut RRR to prop up the economy.

The speculation may not be groundless as China's eased inflation provided more leeway for the policy makers to adopt more relaxed monetary measures.

However, the central government's coherence to "prudent monetary policy" reiterated during the top-level economic policy meeting last week has cast any hasty loosening measures in doubt.

In addition, finance insiders said unexpected bullish shares and warming investment will make the central bank hesitate when mulling operations to pump money.

Peng Xingyun, researcher of Institute of Finance and Banking under Chinese Academy of Social Sciences, said lowering RRR will become a trend in policy adjustment in the medium-to-long run, bringing about positive changes in interest rates and pave way for rate liberalization.

The PBOC implemented targeted RRR cuts for some banks in April and June respectively, while even earlier cuts can be traced back to May 2012.