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Chinese federal bank injects funds after interest rate spike

June 20, 2013

China currently stands as the world's second-largest economy, having experienced substantial rates of growth over the past decade. However, recent speculative financial practices among Chinese banks have caused some instability and provoked the ire of the nation's government and Premier Li Keqiang, who urged the financial institutions to put a stop to risky actions that could be detrimental to economic reform. The latest incident to highlight the banks' problems was a major uptick in certain interest rates, which forced the People's Bank of China (PBOC) to infuse the banking system with 50 billion yuan (approximately $8.2 billion), according to Bloomberg. Chinese financial professionals may want to reach out to foreign business partners to inform them of these issues, using an international calling card.

The news source reports that before the PBOC's cash injection, the one-day repurchase rate among Chinese banks rose by a record 5.27 percent, to reach 12.85 percent. The seven-day rate also spiked to a previously unseen high of 10.77 percent. Previously, Li and the PBOC had held a non-interventionist stance regarding the issues of private banks, such as Bank of China Ltd. Zhou Hao, an economist for Australia & New Zealand Banking Group Ltd. in Shanghai, spoke on this issue.

"The market's move is not just because of liquidity but due to a policy stance that won't change," Zhou told the news source."After Li's statement, the market now sees the crunch lasting longer. Until after mid-July, liquidity won't get better significantly."

According to The New York Times, some of the country's banking difficulties stem from risky borrowing and lending. The source stated that smaller banks will borrow from larger financial institutions and then lend what they have just received - at notably high interest rates - to private businesses that have had trouble applying for loans. If this continues, financial analysts fear it could greatly damage the overall economy.

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