China averts liquidity squeeze by pumping US$92 billion of funding into banks over five weeks to spare the havoc on bonds

China’s central bank has pumped enough cash into the banking system to convince government bond investors that the worst is finally over.

Over the past month, the People’s Bank of China has had to work especially hard to rein in borrowing costs after a surge in credit defaults damped commercial lenders’ enthusiasm to make loans. The central bank injected a net US$84 billion in one-year funding and US$8 billion of short-term cash into the financial system in the final five weeks of 2020 alone.

The PBOC is likely to maintain sufficient liquidity around the Lunar New Year holiday in mid-February, when demand for cash is typically high. Policymakers vowed this month there would be no hasty reversal of monetary easing, saying China’s economic recovery wasn’t yet solid enough. The assurance came after Beijing signalled it will unwind some of the stimulus measures put in place to support growth during the pandemic in an effort to stabilise the record amount of leverage in the economy.

The injections have helped calm money markets and arrest the longest sell-off in government debt since 2007. Interest rates on short-term interbank debt have fallen to a five-month low, and an indicator showing traders’ bets on borrowing costs is set for the largest monthly decline since April.

China’s bond traders are finally taking a breather from a sustained sell-off. The yield on 10-year sovereign notes has fallen around 10 basis points in December, snapping a seven-month rising string and poised for the biggest decline since March. ​ The country will ensure “reasonable and ample liquidity,” maintain “necessary support” for economic recovery, and further reduce lending rates for companies, according to a PBOC statement Tuesday.