2、The injection of fiscal deposits was smaller than in previous years, and the base money supply was lower than expected, likely the main triggers for the tightening liquidity.

3、Many institutions expect similar 'money crunch' events may recur, or even become the norm.

On June 20, 2013, the interbank overnight pledged repo rate hit an unprecedented 30%, a memory still fresh for many traders. Having experienced the June 'money crunch,' most of them never expected that half a year later they would witness the thrilling scene of funding rates jumping by 100 basis points in a single day.

On December 23, the weighted average interest rate for 7-day pledged repos reported 8.91%, with an intraday high of 9.80%, refreshing a near-half-year high, while a week earlier the rate was around 4.4%. 'Liquidity tightened suddenly, and the whole market was in chaos,' described one market participant.

The rapid rise in funding costs began to trigger concerns about its impact on real economy financing and the risk of credit defaults. However, the central bank adopted a different attitude from June, using reverse repurchase agreements in the open market to quell the budding 'money crunch' in a short time. On the morning of December 24, the central bank conducted 29 billion yuan of 7-day reverse repos, finally smoothing fund fluctuations. Market liquidity tensions eased significantly, and overnight and seven-day repo rates retreated from their gains to 6.44% and 4.20%, respectively.

Analysts pointed out that in this round of liquidity tightening, the central bank may not have been the dominant player, but its operations and statements at key moments were quite cautious and restrained, leaving no room for the market to imagine monetary policy easing.

With the advancement of interest rate liberalization and the deepening of domestic financial reforms, many institutions expect similar 'money crunch' events may recur, or even become the norm.

'Money Crunch' Plot Repeats

Similar to June, the rapid rise in money market rates in December was also triggered by the central bank's open market operations. On December 19, the central bank continued to suspend 14-day reverse repos, and after market expectations were dashed, liquidity quickly deteriorated. Commercial banks were then facing multiple liquidity pressures: mid-month reserve requirement replenishment, tax payments, a reduction in the central bank's standing lending facility (SLF) balance, and upcoming year-end precautionary reserves and loan-to-deposit ratio assessments.

Multiple interest rate indicators measuring market borrowing costs collectively broke through new highs since the second half of the year in just a few trading days since December 18, sprinting toward the June peak. The one-month Shibor jumped over 100 basis points to above 7.5%; interbank pledged repo overnight and 7-day products traded at up to 10%.

Off-market rates not visible in trading systems may be even higher. According to traders, three-month negotiated deposits once reached 9%. 'Funds are completing interest rate liberalization at a pace of 5bp per day,' joked a trader at a securities firm in East China.

In the interbank market, tension spread quickly. 'Seeing no reverse repos, institutions with relatively ample funds also refrained from lending out of caution, and rates immediately soared,' said a fund trader at a major bank.

On December 19, market rumors circulated about a default on a fund transaction between Bank of Hangzhou and Ping An Bank, but the parties denied it later. However, the interbank market local currency trading system was closed late for two consecutive days on December 18 and 19, meaning many institutions struggled to square their positions within normal trading hours.

The June money crunch plot repeated, but the central bank's attitude had significantly changed from mid-year. The central bank posted on Weibo on the 19th and 20th that year-end market liquidity conditions were greatly affected by factors such as fiscal revenue and expenditure; in response to new changes in the money market at the end of this year, it had injected over 300 billion yuan of liquidity into the market through SLO (Short-term Liquidity Operations) for three consecutive days. The restart of reverse repos on Tuesday this week finally smoothed the peak in short-term funding rates.

The aforementioned major bank trader believed that compared with the previous week's three consecutive days of non-public SLO, although the 29 billion yuan reverse repo scale was much smaller than 300 billion yuan, the seven-day term covered a longer period and could span the year-end, and it was communicated to all market institutions immediately, making it a clearer policy signal to smooth year-end liquidity.

One detail seemed to show the central bank's unusual activeness in conveying regulatory signals. 'The central bank usually announces reverse repo operations at 9:15, but today it was 15 minutes earlier,' the trader also revealed. 'Probably to give the market a signal at the opening that rates should not be set too high.'

Xu Gao, chief macro analyst at Everbright Securities, pointed out that the central bank's previous suspension of reverse repos was not intended to repeat the money crunch. Not operating reverse repos was, to some extent, a last resort for the People's Bank of China. Against the backdrop of China's economy where fund demand lacks price sensitivity, when the central bank cannot control both price and quantity simultaneously, it reluctantly chose to control quantity rather than price.

From a quantity perspective, market funds were indeed not scarce. The central bank's Weibo post on the 20th pointed out that excess reserves in the banking system had exceeded 1.5 trillion yuan, a relatively high level for the same period in history. In November, the increase in foreign exchange funds outstanding for all financial institutions was 397.9 billion yuan, lower than the 441.6 billion yuan increase in October but still at a relatively high level. External liquidity played a role in supplementing domestic liquidity, completely opposite to the situation around June when foreign exchange funds decreased and capital tended to flow out.