China cash crunch test looms as US$151b set to leave system

[SHANGHAI] China will face one of the biggest tests of its campaign to contain corporate leverage next week, with more than US$151 billion set to leave the already stretched financial system.

Some 890 billion yuan (S$183.4 billion) of reverse-repurchase agreements issued before the week-long Lunar New Year break to meet seasonal demand will start coming due from Monday. Add that to the 151.5 billion yuan of maturing loans to commercial banks and conditions could be tight if lenders haven't hoarded enough cash, according to Commerzbank AG.

"Deleveraging will be a prolonged process, there will probably be very painful periods for the markets going forward even as the central bank adopts a very sophisticated balancing act," Zhou Hao, senior emerging-markets economist at Commerzbank in Singapore, said in an interview. "The PBOC has so far done a good job in managing liquidity, compared with a cash crunch in 2013."

China has been stepping up tightening efforts since the third quarter, boosting the tenor of reverse-repo operations and the cost of medium-term loans as a way of forcing a reduction in leverage, while containing risks to the nation's nascent economic recovery. If the People's Bank of China miscalculates the situation with liquidity, its methods could lead to a cash squeeze akin to the one that took place in June 2013, when benchmark money rates soared to records as officials drained funds amid tight conditions.

One option is for the central bank to roll over its Temporary Liquidity Facility - a new tool the PBOC used before the holiday to provide 28-day funds to major commercial lenders - while extending the pause in reverse-repo operations, according to Citic Securities Co. The central bank held off on injecting funds via reverse-repo agreements for a sixth day on Friday, saying liquidity levels are relatively high.

China's benchmark seven-day repo rate, a gauge of interbank funding availability, fell eight basis points in the past five days to 2.42 per cent, according to weighted average prices. Bonds advanced, with the yield on 10-year sovereign debt retreating seven basis points from Saturday to 3.43 per cent, according to National Interbank Funding Center prices.

BLOOMBERG