PBOC’s inaction exposes lack of money channeled to real economy; China set a world record in May after its M2 money supply surged to 104 trillion Chinese yuan (US$16.84 trillion)

PBOC’s inaction exposes lack of money channeled to real economy

Staff Reporter

2013-07-01

Though China’s banks might feel the squeeze from the central bank’s frozen accounts these days, the country is far from being out of money supply. China reported the world’s highest broad M2 money supply in May, the party-run Beijing Youth Daily reported.

China set a world record in May after its M2 money supply surged to 104 trillion Chinese yuan (US$16.84 trillion), but local banks have been struggling with a liquidity strain since late May, pushing the interbank borrowing rate higher, the newspaper said.Banks usually face tight liquidity at the end of the month, quarter or year, the newspaper said, as they have to make more payments during these times.

While such seasonal factors have contributed to the recent cash crunch, the People’s Bank of China’s decision not to inject liquidity into the market made the situation worse, according to the newspaper.

The overnight interbank borrowing rate surged to 30% during the trading session and closed at 13.44% on June 20, up from 7.66% on the previous day.

The fact that the central bank issued 2 billion yuan (US$323.90 million) in central bank notes on that day to mop up liquidity from the market, the newspaper said, shattered banks’ expectation that more help would be on the way.

Chinese foreign exchange regulators’ tightened control of cross-border capital, which has caused a fund outflow, also restricted money supply in the market, the newspaper said.

The PBOC’s inaction has fueled panic, and larger banks’ unwillingness to lend out money further led to repurchase agreement rates rocketing.

In its statement released on June 26, the PBOC said there is ample liquidity in the market, as financial institutions had total provisions of 1.5 trillion yuan (US$242.92 billion) as of June 21, and 600 billion to 700 billion yuan (US$97.17 billion-$113.36 billion) is enough to meet normal payment and settlement needs.

The Chinese central bank reiterated that it would stick to the current steady monetary policies, and said that banks should improve their management of liquidity, as well as their assets and debts.

Banks should stop expecting the government to introduce easing measures, such as cuts in interest rates or the required reserve ratio, the report said.

The PBOC was also telling local banks to pay attention to the growing risks associated with business expansion, the newspaper added.

On the other hand, sources told the newspaper that the central did help out several banks that have been prudent in their practices, while banks with sufficient liquidity have been lending money to help stabilize the market.

Tian Guoyong, a professor at the Central University of Finance and Economics, pointed out that the recent cash crunch is a structural problem, as the liquidity has not been directed into the real economy, but has been kept in the interbank market so the banks could make more money.

Experts said monetary policies alone are not enough to solve such a problem, and that the government needs to introduce fiscal, tax and industrial policies so that money could be channeled into the economy