Stock index edges up after PBOC adds funds

China's benchmark equity market rose slightly on Tuesday, after the central bank injected funds into the financial system via open-market operations for the first time in three weeks, in a bid to alleviate a cash crunch.

The benchmark Shanghai Composite Index rose 0.15 percent to 2,092.91 points at the close from a four-month low on Monday. Turnover was at 61.7 billion yuan ($10.1 billion), up from 58.4 billion yuan on Monday.

Analysts said the liquidity crunch was the major cause of a consecutive nine-day loss in the SCI in the last two weeks. Although the tight liquidity situation has been eased with the central bank's help, investors are pessimistic, as they believe that a long-term liquidity squeeze is still possible.

On Tuesday, the People's Bank of China, the nation's central bank, auctioned 29 billion yuan of seven-day reverse-repurchase agreements at a yield of 4.1 percent, after it injected 300 billion yuan to targeted recipients last week.

The seven-day repurchase rate — a gauge of funding availability in the banking system — tumbled 344 basis points, or 3.44 percentage points, to 5.4 percent, according to a daily fixing from the National Interbank Funding Center. It more than doubled to 8.84 percent in the past five days.

"It has been proved by many markets that volatility of short-term interest rates grows bigger at the initial stage of interest rate liberalization," Wang Hanfeng and Li Qiusuo, analysts at China International Capital Corp, wrote in a note.

It's still uncertain whether the central bank's short-term adjustment move will be able to effectively ease investors' worries, but the A-share market will likely rebound if there's a solid signal from monetary authorities that they will ease liquidity, the analysts added.

Most analysts and economists believe that seasonal factors have boosted the money market rates in China, but they also think that liquidity will likely remain tight for at least another couple of weeks.

"We think that clearer communication from the central bank may help calm market sentiment and prevent rates from rising further," said Wang Tao, chief economist in China at UBS AG.

"However, it's possible that the PBOC is expecting banks to adjust their behavior accordingly in light of higher rates and tighter liquidity," Wang added.

After the July liquidity squeeze and the current tightness, market participants will be more cautious, and hence money-market rates could remain high until the Chinese New Year break at the end of January, said Frances Cheung, the Hong Kong-based head of Asian rates at Credit Agricole CIB.

The PBOC is likely to conduct reverse repos again on Thursday as Tuesday's amount wasn't significant and the tenor doesn't cover the year-end period, she noted.

Rapid credit growth in China has reminded authorities of the risk of asset bubbles fueled by rising debt levels. The PBOC has been urging lenders to refrain from shadow-banking activities and pushing forward deleveraging in China.

Most analysts also said that, under China's current control of the capital account, the US Federal Reserve's recent decision to begin reducing its quantitative easing program will have a limited direct impact on Chinese markets.