Why is China’s central bank giving more cash to lenders?
Lunar New Year came early for a select group of state lenders on Friday when the Chinese central bank released a flood of cheap money to ward off liquidity shortages.
The People’s Bank of China (PBOC) did not say how much money was released or at what rates. But it did describe the operation as a “temporary liquidity facility”, a new term that suggests the practice could become a new way for the PBOC to pump cash into the banking system.
The central bank already uses standing-lending and medium-term lending facilities to lubricate the financial system. The addition of the new liquidity tool underscores the PBOC’s need to balance two conflicting policy goals of keeping liquidity abundant and avoiding yuan depreciation.
Central bank governor Zhou Xiaochuan has been careful to avoid giving any signs of “monetary easing” for fear of exacerbating capital outflows and a drop in the currency.
To that end, the PBOC has opted for system tweaks to adjust the availability of funds and shelved traditional tools such as changes to benchmark interest rates and required reserve ratios.
China Merchants Securities analyst Yan Ling said that approach was set to continue.
“The central bank will refrain from lowering reserve ratios” and rely on small liquidity tools, Yan said. “The yuan still faces depreciation pressure, inflation is expected to rise in 2017, and the US Federal Reserve’s rate hikes will continue to restrict the PBOC’s monetary policy,” he said.
The hesitation to alter the amount of money banks must hold in reserve is a contrast with the past. Since taking up the top central bank job in 2002, Zhou has changed the required reserve ratio at least 45 times, raising it from 6 per cent to a peak of 21.5 per cent in 2011. The last cut came on February 29 last year when the ratio for some banks was reduced to 16.5 per cent.
The need for new central bank tools was highlighted by a “cash crunch” in the banking system in June 2013 when the overnight rate surged to an alarming 30 per cent. The PBOC stepped in withcash injectionsand has continued to do so to ease cash shortages.
It said Friday’s temporary liquidity support was an “additional” help because the PBOC had already injected 1.19 trillion yuan (HK$1.34 trillion) into the banking system via its “normal” open-market operations last week.
“Beijing does appear to be taking a more cautious approach following the bond and interbank market meltdowns in December,” said Rafael Halpin, research head of North Square Blue Oak, a China-focused investment bank.
The PBOC’s unusual move on Friday “does raise questions regarding the sustainability of the central bank’s reliance on its current liquidity injection tools to offset money being drained through capital outflows,” Halpin said. It “likely heralds the latest evolution in PBOC monetary policy”.
China International Capital Corporation said China faced a total liquidity gap of 2 to 3 trillion yuan this month, partly due to an estimated outflow of 400 billion yuan as well as extra corporate and individual demand for cash.