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POLITICAL ECONOMY
China cash injection fails to soothe markets
by Staff Writers
Beijing (AFP) Dec 20, 2013


Bitcoin recovers after slumping on China bank measures
Shanghai (AFP) Dec 19, 2013 - The value of the volatile virtual currency Bitcoin leapt in China on Thursday, after falling nearly 50 percent one day earlier due to new restrictions reportedly imposed by the central bank.

Late Thursday Bitcoins were trading at 3,430 yuan ($565) each on China's biggest trading platform BTC China, up more than 70 percent from an intra-day low of 2,011 yuan on Wednesday.

But despite the recovery the Bitcoin price in China lagged behind those on major global exchanges. Price differences between them are usually small.

Bitcoins were trading at $714 each on Japan's Mt. Gox and being quoted at $665 on UK-based BitStamp, data from their respective websites showed.

The volatile trading in China came after BTC China and its Chinese counterpart OKCoin on Wednesday stopped taking yuan deposits following a ban reportedly imposed by the central bank.

Domestic third-party payment companies were barred from providing clearing services for virtual currency trading platforms, state-run media have reported, adding the instruction was given at a closed-door meeting.

Two weeks ago the People's Bank of China, the central bank, ordered financial institutions not to provide Bitcoin-related services and products and cautioned against its potential use in money-laundering.

Bitcoin, invented in the wake of the global financial crisis by a mysterious computer guru using the pseudonym Satoshi Nakamoto, is a form of cryptography-based e-money.

It can be stored either virtually or on a user's hard drive, and offers a largely anonymous payment system.

But Beijing keeps a tight grip on the yuan and enforces capital controls, which are threatened by the very nature of the e-currency.

A rise in China's interbank interest rates on Friday showed that markets remain uneasy despite a cash injection by China's central bank, said dealers.

The rates, which serve as the funding costs for pricing and investment, have been trending higher in recent weeks as the People's Bank of China (PBoC) had recently refrained from injecting further liquidity before Thursday's move.

On Friday the seven-day repurchase rate -- a benchmark for interbank borrowing costs -- rose to 7.75 percent from Thursday's close at 7.06 percent, said Dow Jones Newswires.

That came despite the People's Bank of China (PBoC) announcing before market close that it had "appropriately injected" an unspecified amount of cash into the market.

The measure followed a spike in the seven-day rate to 9.8 percent earlier in the day, the highest since a cash crunch in June that unnerved global markets.

Before Thursday's intervention, the central bank had for the past two weeks suspended a routine move to release liquidity -- owing to fears about a growth of bad debt that could weigh on the economy.

But that sent jitters across the market, with big banks scrambling to increase their cash reserves as they struggled to meet regulatory requirements on capital by year's end, sending up interest rates that lenders charge to lend to each other, analysts said.

This prompted the central bank to step in on Thursday by conducting short-term liquidity operations (SLOs) to inject cash.

"If necessary... (authorities) will continue to provide liquidity support to qualified financial institutions via SLO," it said on its account on Sina Weibo, a Chinese equivalent of Twitter.

Analysts said the move showed that the central bank intended to soothe market fears about an recurrence of the liquidity crunch in June, which sparked worries over China's slowing economic growth as lenders cut loans to companies.

"The PBoC learned the lesson in June and it will surely avoiding playing with fire again," Lu Ting and Zhi Xiaojia, Bank of America Merrill Lynch's economists in Hong Kong, said in a research note.

ANZ economists Liu Ligang and Zhou Hao called for further measures to lower the market interest rate and restore confidence.

"We believe the central bank's intervention is necessary and timely," they said in a note.

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