China Central Bank Extends Emergency Loans to Financial Firms

China’s central bank extended hundreds of billions of yuan in emergency loans to financial firms on Friday and ordered some of the country’s biggest lenders to extend credit as well, as it moved to ease a liquidity crunch and continuing debt selloff.


The moves marked a second day in which the People’s Bank of China pumped money into the financial system and markets, after the U.S. Federal Reserve signaled it might quicken the pace of its rate increases. That in turn spooked Chinese investors who were already worried about government attempts to let the air out of a highly leveraged and overheated bond market by tightening credit.


On Friday, the yield on China’s 10-year government bond jumped about 0.1 percentage point to 3.33%, while yields on the interest-rate sensitive two-year government bond and the 30-year bond, which responds to inflation expectations, rose even more. That followed a Thursday plunge in the price of some bond futures contracts that led authorities to temporarily halt trading. Yields rise as prices fall.


Investors and analysts said that the PBOC’s moves—which ended up pumping around 600 billion yuan ($86.3 billion) into the markets and financial system in two days—have helped calm some of the jitters.


“These policy interventions have helped tremendously in pacifying the mood,” said Zheng Lianghai, fixed-income analyst at Dongxing Securities in Shanghai.


Yet some market-watchers say that a host of factors—from rising global rates to the central bank’s attempts to deflate China’s asset bubbles—could hit the country’s $9 trillion bond market, where yields hit record lows this year. If the bond selloff accelerates, some analysts fear China could see a market crash like the one that hit stocks last year.


“Higher global yields, higher inflation globally and in China, and the PBOC’s deleveraging effort—everything is pointing in the same direction” to put pressure on bonds, said Frances Cheung, head of Asia rates strategy, Asia ex-Japan, at Société Générale in Hong Kong.


On Friday, the PBOC tapped an emergency lending facility it created in 2014 to extend 394 billion yuan ($56.7 billion) in six-month and one-year loans to 19 banks. That pushes the net amount extended through the facility to 721.5 billion yuan so far in December, a monthly record, according to Beijing-based research firm NSBO.


The PBOC also ordered a few large banks to extend longer-term loans to nonbank financial institutions, while China’s securities regulator asked brokers tasked with making a market in bonds to continue trading and not shut any companies out of the market, according to Mr. Zheng of Dongxing Securities.


The central bank also injected a net 45 billion yuan into the money market on Friday, following a net 145 billion yuan cash infusion on Thursday.


“The whole market is scrambling for liquidity and the PBOC is ready to do more to calm the market,” said Arthur Lau, head of Asia ex-Japan fixed income at PineBridge Investments in Hong Kong.


Some year-end factors are exacerbating liquidity concerns. Banks are storing up cash to prepare for an expected rush to move money abroad in the new year, when Chinese foreign-exchange quotas for individuals reset. Banks are also preparing for an early Lunar New Year in 2017, when Chinese traditionally give gifts of cash.


Yet the jitters go deeper than seasonal factors. Increased prospects for inflation—and a more hawkish Fed—come as Chinese regulators have already started to tighten short-term borrowing conditions in recent weeks to cool overheating Chinese markets. Over the past year, speculators have borrowed from money markets to fund investments in bonds and other financial products.


A weakening Chinese yuan, which has fallen 7.2% against the U.S. dollar this year, has also kept the pressure on officials to tighten monetary policy and stem capital outflows. The country’s foreign-exchange reserves plummeted by $69 billion in November to $3.052 trillion, putting reserves at their lowest level since March 2011. Officials are ramping up their capital controls to keep the yuan from fleeing overseas by cracking down on overseas acquisitions by mainland companies and limiting how much money multinational companies can move out of the country and into their global operations.


Chinese banks are also being pushed by new domestic regulations to bolster capital levels, and some are rushing to boost their cash positions by selling bonds before the year-end deadline, analysts say.