Liquidity crunch ruled out amid cash squeeze

Month seen as tough period for market with demand soaring on key seasonal factors

BEIJING - Chinese financial markets may be in for a month of cash squeeze pressure in June but a liquidity crunch is unlikely to happen.

Liquidity refers to the amount of capital available on the market, and how easily it can be used.

The abundance of liquidity has wide implications on the stock, bond, housing and other markets.

"June is a cruel season for China's money market, with liquidity demand usually spiking on seasonal factors such as quarterly regulatory reviews, tax payments and the simple fear of a reoccurring liquidity crunch," said Zhao Yang, Nomura chief China economist.

A credit crunch at Chinese banks in June 2013 caused interbank interest rates to surge to double digits and pounded the stock market, sparking concern among investors and leaving them with a long-lasting memory.

"We believe that liquidity conditions are likely to further tighten slightly in June, but that a replay of a liquidity crunch is unlikely," Zhao said.

The view was echoed by Ming Ming, a senior analyst with CITIC Securities, who said that June traditionally features a tightening of financial conditions, while the macro prudential assessment has added pressure to market liquidity.

The People's Bank of China, the central bank, has adopted the MPA, a formal evaluation covering loans and other assets including investment on bonds and equities, and assigned a score to each bank based on parameters such as asset quality, capital adequacy, proportion of liquid assets and funding stability, in its battle to stem financial risk.

"Judging from the recent policy action from the central bank, a liquidity crunch is not likely to emerge, as the central bank will move to ease market worries," Ming said.

China has set the tone of its 2017 monetary policy as prudent and neutral, keeping an appropriate liquidity level but avoiding excessive liquidity injections.

China's central bank injected 525.8 billion yuan ($77.4 billion) into the market in May via various monetary policy tools to maintain market liquidity.

"The PBOC has learned its lesson from the liquidity crunch in June 2013 and is likely to smooth liquidity conditions when demand spikes," said Zhao.

China's central bank on Monday injected 30 billion yuan into the financial system through 28-day reverse repos to maintain stable liquidity.

Chen Ji, an analyst with the Bank of Communications, said the move aimed to ease the relatively tight market liquidity in June and July.

Against the backdrop of tightening supervision to ward off financial risk, some analysts cautioned that investors should expect bouts of liquidity pressure, and the market may feel the pain as well.

Xinhua