Chinese central bank worries markets with cash squeeze statement

Bad liquidity management blamed for squeeze.

BBVA noted that the central bank has issued a statement on its website explicitly linking the squeeze in the interbank market, which began on June 6, to banks’ liquidity management practices, believed to relate to activities in the shadow banking market which the authorities are trying to curtail.

"As such, the statement confirmed market speculation that the cash squeeze is being tolerated by the PBoC as a warning to banks to curtail their aggressive lending practices and reduce risky activities in the shadow banking market," said BBVA.

"Interest rates in the money market remain elevated at around 7%, compared to an average of 3-4% prior to June 6. While we expect the PBoC to ease the liquidity shortage soon to prevent damage to the real economy, the statement on the website gave no indications to this effect, giving rise to risks that the tightness may persist for a while longer," it added.