China’s cash squeeze worsening

Liquidity shortage the worst in seven years.

The People's Bank of China, the central bank, suspended the issuance of central bank bills and repurchase operations last week to calm liquidity tensions. The move, however, is hampering securities trading, causing a drop in institutional demand.

Sources said major commercial banks are pressuring PBOC to free-up funds to ease the unusual cash squeeze, such as cutting reserve requirements for banks.

Analysts believe, however, that PBOC will gradually improve the liquidity supply in the next few days or weeks, but won't cut interest rates or the reserve requirement ratio among banks.

Agricultural Development Bank of China, a major policy bank, slashed the size of two bond offerings on June 11 by 31%, by selling US$1.3 billion of three-year notes, down from its previous target of US$2.1 billion.

It also reduced an issue of five-year debt to US$1.3 billion from US$1.6 billion, blaming recent fluctuations in bond market liquidity.

The Ministry of Finance last week sold US$1.6 billion of 273-day bills, less than the target of US$2.4 billion, the first time that sales of treasury debts had missed the issuance target in the past 23 months.

Last Thursday. PBOC suspended the issuance of central bank bills and repurchase operations to soothe liquidity tensions.