CHINA’S cash market squeeze showed little sign of easing yesterday, reinforcing the view the central bank has shifted to tighter monetary policy.

    The central bank appears to be trying to force banks to curb risky lending practices in the shadow banking system amid rising concerns about excessive debt. Rapid growth in the world’s second-largest economy over the last four years has also fanned fears about a property market bubble.

    The key seven-day bond repurchase rate initially opened lower but then spiked to 8.9 percent on a weighted-average basis yesterday, up from 8.21 percent Friday.

    The central bank announced after market close Friday that it had injected 300 billion yuan (US$49.41 billion) via short-term liquidity operations from Dec. 18 to 20. The seven-day rate reached as high as 10 percent Friday, the highest level since June.

    The People’s Bank of China also emphasized that excess cash reserves in the banking system — a key measure of liquidity — stood at more than 1.5 trillion yuan, a high level by historical standards. But market players took a different view.

    “The central bank appeared to stress that cash reserves are abundant in comparison with previous years, but the market has expanded sharply in recent years and demand in the interbank market has far exceeded the previous years’ levels,” said a money market trader at a major domestic commercial bank in Shanghai.

    A suspiciously low opening trade yesterday may also reflect the central bank’s attempt to calm the market. The seven-day repo opened sharply lower at 5.57 percent. In recent days, traders have expressed suspicion that such low opening quotes on benchmark rates reflect intervention by the central bank in an effort to guide trading.

    The unusual timing of yesterday’s opening trade bolstered such suspicions. The opening trade on the seven-day repo came unusually early at 9:01 in the morning, but the next trade, at 7.60 percent, did not occur until nearly an hour later, according to data from the National Interbank Funding Center. Rates continued to rise further.

    Traders say that a large volume of maturing debt near the year-end, which banks need to roll over, have contributed to the spike in rates. The market is interpreting the central bank’s tough stance as an unofficial shift towards tighter monetary policy. (SD-Agencies)