China central bank injects cash ahead of holidays

China's central bank pumped a net 365 billion yuan into the financial system this week, the highest weekly injection in history, in a move that apparently aims to meet robust cash demand for the upcoming week-long holidays.

The increase in liquidity also came as data showed this month that outflows of foreign-exchange capital accelerated amid concerns about the worsening economic situation on the mainland, where growth slowed to the lowest pace in three years in the second quarter.

As a result of the cash injection, the one-month Shanghai interbank offered rate, or Shibor, dropped 66 basis points to 4.17 per cent, the sharpest fall in eight months.

The People's Bank of China has been using reverse repurchases since June as a major tool to inject liquidity, which is a more flexible way to add cash but usually less effective than cutting banks' reserve requirement ratios, which is the share of deposits that banks are asked to park at the central bank as reserves.

The central bank has lowered the reserve ratio three times since late last year and cut interest rates twice in June and July.

"The reverse repos may not be adequate to spur the weak economy," said Hu Yifan, head of research at Haitong International Securities. "China needs more aggressive monetary policy, such as cutting reserve requirement ratios … the whole world is printing more money after the United States introduced the third round of quantitative easing," she said.

The mainland's financial markets will be shut due to the mid-autumn Festival and the National Day holidays from September 30 to October 7.

China's economic situation is generally sound, with a slowdown in growth a desirable outcome, Liu Shiyu, a vice governor of the People's Bank of China said yesterday. He reiterated that support for growth must be balanced by the need to curb inflation.

Chen Yulu, an academic adviser to the PBOC, said yesterday China had underestimated the severity of the global economic slowdown. He said whether the PBOC would opt to boost the economy by further cutting interest rates or reserve ratios "will hinge on the degree of deterioration of the external situation".

Additional reporting by Reuters