SHANGHAI, Jan 21 (Reuters) - China's money market rates fell sharply on Tuesday after the central bank dumped more than 255 billion yuan ($42 billion) into the financial system, easing concerns another credit crunch was underway less than a month after a late December squeeze.
The People's Bank of China (PBOC), facing signs that rising benchmark rates could spike, announced late on Monday it had provided cash directly to some banks through a short-term lending facility (SLF) and that it would inject more funds early on Tuesday.
Long-time market watchers said it was virtually unprecedented for the central bank to openly declare its intentions to inject or withdraw funds at regularly scheduled open market operations.
The move appeared to be a response to criticism it keeps traders in the dark about its market plans, which in the past resulted in markets overreacting when it did take action.
"Such a huge injection," said a trader at a joint-stock bank in Shanghai. "Now we can get through the upcoming Lunar New Year holiday in peace."
The weighted average for the benchmark seven-day bond repurchase rate, considered the best indicator of general liquidity conditions, fell more than a full percentage point early on Tuesday following the injections, declining to 5.4075 percent down from 6.5920 percent on Monday's close.
Other commonly traded rates posted similar declines.
Equity indexes rose, with the benchmark CSI300 Index gaining over 1 percent in morning trade.
The central bank has been content to allow short-term rates to rise in order to discourage commercial banks from dabbling too much in the sort of high-risk lending that has produced inflation and industrial overcapacity.
It has done this through administrative measures and by reducing the amount of cash it injects into the interbank market, the fundamental pool that banks draw on to cover risky side bets they make through trust loans and other unconventional credit instruments.
But its refusals to inject cash into the pool during high demand periods has produced frequent short-term panics in the market, with three dramatic spikes occurring in 2013, the most recent in December.
The January rise in rates came after the central bank abstained from injecting funds through scheduled open market operations for seven consecutive sessions.
The latest injection to calm markets comes in the runup to the Chinese Lunar New Year holiday, when cash demand rises sharply and when mainland financial markets will be closed for the week in the beginning of February.
Stock and money market traders have been concerned the resumption of initial public offerings (IPOs) in China in January would put additional pressure on money supply and Chinese stock markets, which tend to be sensitive to money supply indicators.
Economists are also worried markets are jittery over whether a 3 billion yuan mining trust loan, underwritten by China Credit Trust, will be allowed to default at the end of the month.
"When defaults of trust products happen, financial markets could panic again," Lu Ting, economist at Bank of America Merrill Lynch, wrote in a research note on Monday, while predicting the government would be able to control the process.
"Despite our doubt in Beijing's capability in many aspects, we expect a relatively orderly unfolding of these non-performing trust loans."