China Asks Big Banks to Curb Interbank Lending to Ease Cash Glut

China's financial regulators instructed major state-owned banks to curtail their lending activities within the interbank market this week. This directive aims to prevent interbank borrowing costs from falling significantly below the central bank's policy interest rate, a move intended to maintain stability in short-term funding markets. The People's Bank of China (PBOC) has been observing a substantial increase in liquidity within the banking system, partly due to the central bank's own monetary easing measures. These measures, including cuts to reserve requirement ratios and policy rates, have injected significant cash into the financial system. However, this excess liquidity has led to a surplus of funds available for interbank lending, pushing down overnight and seven-day repo rates to levels considerably lower than the PBOC's benchmark policy rates. By asking banks to reduce their interbank lending, authorities seek to absorb some of this excess liquidity and ensure that market rates remain closer to the intended policy stance. This action is a delicate balancing act, as while ample liquidity can support economic activity, excessively low borrowing costs can distort market signals and potentially encourage excessive risk-taking. The move signals Beijing's intent to exert more direct control over short-term money market dynamics to align them with broader macroeconomic objectives.