Chinese Central Bank Activates its Support for Commercial Banks to Meet Capital Adequacy Standards

Top Quote The People's Bank of China injected a net 365 billion yuan (57.92 billion dollars) to the capital markets during the last week of September. Financial regulator tries to maintain the country's falling stock market with the funds allocated to banks. End Quote
  • Los Angeles-Long Beach, CA (1888PressRelease) October 05, 2012 - The Chinese central bank uses the way tested by ECB and the Federal Reserve System in the USA - to support the economy afloat pumping it with money. First, it seeks to support commercial banks and prevent a liquidity crunch in the financial system. Commercial banks of China need money to meet capital adequacy standards set by the regulator. The second goal is to support the falling stock market. As previously announced on Wednesday, September 26, 2012, the main share index of China Shanghai Composite fell to the lowest level since 2009, dropping below the bar of 2000 points. On Thursday, it was trading at 2050 points, from the beginning of the day the increase was about 2.6%.

    The Central Bank used the repo to finance the banking sector. A repo is one of the most common ways of financing banks from the regulators funds. Meanwhile, the Central Bank is buying debt securities of the commercial financial organizations, which will repay at a premium after a while. Repo injections volume of 57 billion dollars is great not only for China but also for other countries.

    According to Bloomberg, which refers to information from the Ministry of Commerce of the PRC, foreign direct investment in China fell by 1.4% in August, which is $ 8.33 billion following the ninth of the last ten months. Thus for the first eight months of this year, investment in China fell by 3.4% to $ 75 billion, while China's foreign investment rose by 39% - to $ 47.7 billion. Investors fear that Beijing's time expired, and that the planned slowdown may be offset by the global economic downturn.

    "We have indeed underestimated the severity of the external economic situation. Monetary policy faces a dilemma. On the one hand the central bank needs to stabilize economic growth and on the other hand, it's very worried about the problem of property prices. Money market operations is more reflective of the PBOC's push for financial sector reforms that let the markets take a more active role in setting the price of capital, the central bank could not simply loosen policy to boost the economy as it needed also to spur structural change. The adoption of reverse repos reflects this policy consideration, "- said Chen Yulu, Renmin University Professor (China) Academic Advisor Monetary Policy Committee of the People's Bank of China. According to the financial advisor Dmitry Chernavski, infusion of central banks is one of the driving forces of the stock of optimism. At the same time, the public injection of funds into the markets of the EU, the USA and China central banks, is a coordinated anti-crisis policy of the world's largest countries, said Dmitry Chernavski. "The uniqueness of the situation is that, despite the huge infusion of funds into the economy, inflation remains under control, because of the high unemployment and global economic slowdown," - said Dmitry Chernavski.

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