China | Understanding the interbank liquidity crunch and the policy intentions

Two important reasons could contribute to the recent interbank liquidity crunch: the PBoC’s intention to alert the recent soaring stock market, and more importantly, the temporary failure of the central bank’s calibrated liquidity operation model under the recent challenging market environment.

Key points

• Key points:
• China’s interbank market experienced a surprising liquidity crunch at end-January, again, raising the market concern of an early exit of accommodative monetary policy measures amid an accomplishment of a V-shape recovery.
• During the pre-Lunar New Year holiday, normally regarded as an ample liquidity period, interbank rates synchronized to hike, together with the PBoC's liquidity withdraw moves.
• We cannot exclude the reason that the PBoC wanted to alert and cool down the recent soaring stock markets by straining the interbank liquidities.
• But more importantly, current challenging and complicated market environment makes it difficult for the PBOC to accurately predict liquidity demand based on the calibrated liquidity operation model under the new corridor framework.

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