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China interbank interest rates surge again

BEIJING--China's interbank interest rates surged again on Monday despite hefty cash injections last week by the central bank, suggesting money market stress remains as authorities maintain a prudent stance.

The seven-day repurchase-agreement rate — a benchmark for interbank borrowing costs — rose to 9.8 percent, the highest since it hit 11.62 percent on June 20 at the peak of China's summer cash crunch that unnerved global markets, according to Dow Jones Newswires.

“The spike in interbank rate indicates that the lack of market confidence has worsened the liquidity crunch,” Wendy Chen, a Shanghai-based economist at Nomura Securities, told AFP.

The rates, which serve as funding costs for pricing and investment, have been trending higher recently as the People's Bank of China (PBoC) had refrained from injecting further liquidity through a routine open market operation for two weeks.

In a gesture to calm the market, the PBoC announced Friday that it had injected more than 300 billion yuan ($49.4 billion) into the financial system over a three-day period via the so-called short-term liquidity operations (SLOs).

“Currently the banking system has excess reserves of over 1.5 trillion yuan, a relatively high level compared with the same periods in history,” it said on its verified account on China's Twitter-like Sina Weibo.

The announcement followed a similar statement on Thursday that the bank had “appropriately injected” an unspecified amount of cash into the market through SLOs.

The interbank market responded with brief signs of improving funding conditions earlier Monday. The repo rate began the day's trading at 5.57 percent, down from Friday's 8.2 percent, before rebounding.

“More credit and further measures from the PBoC are probably required, to let the market regain its confidence, before the rate can become stabilised,” Chen said.

Chinese shares edged up Monday, with the benchmark Shanghai Composite Index ending up 0.24 percent at 2,089.71. But analysts warned that the gains will soon evaporate without fresh funds flowing into the stock market.

The state-run Securities Times newspaper on Monday quoted analysts as saying that the central bank intended to signal to the market its “neutral but slightly tight” policy stance by keeping suspended its routine, more aggressive liquidity-releasing tools and appeasing the market only with SLOs.

The SLOs are discreet, targeted exercises confined to a select group of 12 banks that are deemed crucial to the overall stability of China's financial system. They are a new tool the PBoC introduced in January.

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