Central bank action raises liquidity concerns

The suspension of liquidity injection via the open market by China's central bank has added to growing concern of liquidity shortage as interbank bond repurchase rates rise. The central bank's last reverse repurchase (repo) was on Dec. 3, but has since suspended injecting liquidity via reverse repos. Analysts fear pressure on liquidity toward the end of the year. Benchmark interbank repo rates for one and seven products both rose sharply on Thursday to 3.83 percent and 6.6 percent, respectively. The Shanghai Interbank Offered Rate (Shibor) also gained on Thursday, with overnight Shibor rising 25.8 basis points to 3.846 percent, and the seven day and two week rates up to 6.472 percent and 6.218 percent, respectively. Shibor represents the cost of interbank borrowing, and is a key barometer of liquidity. Qu Qing, an analyst at Shenyin Wanguo Securities, said the absence of open market operations this week undoubtedly tightened liquidity. A severe liquidity crunch is not seen as likely, as the central bank may find other ways to inject liquidity, such as short-term liquidity operations, as used in late October.