Central bank's liquidity operation is credit positive

The new liquidity operation by the central bank is positive for Chinese banks because it will allow banks greater access to short-term funds and thereby will stabilize their liquidity, Moody's Investors Service said on Monday.

The People's Bank of China, China's central bank, said on Jan 18 that it would immediately begin conducting short-term liquidity operations with 12 commercial banks to address liquidity fluctuations in the banking system.

Moody's expects the move to lower banks' funding costs.

"We expect the start of the central bank's short-term liquidity operation to inject funds into the system. This will lead to smaller and less frequent interest rate spikes, thereby lowering banks' funding costs," the report said.

"We also interpret the PBOC's changes as a signal that the central bank will expand its use of open market operation tools such as repos and reverse-repos to carry out monetary policies," the agency said.

"As a result, the PBOC may find less need to change banks' required reserve ratios, enabling banks to more easily manage their liquidity," it added.

Moody's said smaller Chinese banks, such as Shanghai Pudong Development Bank and Industrial Bank, will benefit the most from the new initiative because their liquidity positions are generally more strained by their rapid loan growth and limited deposit franchise.