PBOC offers emergency funds to banks amid latest cash squeeze

China's central bank has provided emergency funding support to commercial banks and will add more cash on Tuesday, as authorities respond to a spike in cash rates ahead of a major holiday, the bank announced on Monday.

The move by the People's Bank of China (PBOC) comes after the interest rate that banks charge each other for short-term loans spiked in recent days.

Bankers and analysts say the PBOC is attempting to strike a balance by guiding interbank interest rates steadily higher to reduce excess credit growth, while avoiding an acute credit crunch that could spark panic and choke off financing to the real economy.

The central bank also appears to be responding to criticism that it failed to communicate effectively with the market during a severe cash crunch that roiled markets in June. Bankers and analysts criticized the PBOC for remaining largely silent as panic gripped the market and rumors swirled about interbank defaults.

"The central bank's operations are just a flexible response to the liquidity situation. They weren't planning to inject funds," China International Capital Corp (CICC) wrote in a note to clients late on Monday.

The PBOC said via its official Weibo micro-blog that it had provided an unspecified amount of funding to the largest banks via its Short-term Lending Facility (SLF).

The central bank also said it will inject further cash into the banking system at regularly scheduled open market operations on Tuesday. The central bank has not injected funds through such operations since December 24.

Indeed, long-time market watchers said it's virtually unprecedented for the central bank to openly declare its intention to inject or withdraw funds at regularly scheduled open market operations. Typically, the market learns of these operations only after they are conducted.

But in an echo of previous statements, the PBOC again urged banks to improve liquidity management. Regulators have also expressed concern about some banks' excessive reliance on short-term funding markets.