China injects US$31 billion into financial system to alleviate rising liquidity pressure
- Cash injection sees 200 billion yuan added through seven-day reverse repurchase agreements
- Liquidity conditions in China tend to tighten toward the end of the year, as banks hoard cash to prepare for regulatory checks
China has boosted its injection of short-term cash into the banking system to the highest level in two months, as demand for liquidity climbed before year end.
The People’s Bank of China (PBOC) added 200 billion yuan (US$31 billion) worth of cash into the financial system through seven-day reverse repurchase agreements, more than offsetting the 10 billion yuan coming due. The move came after an indicator for short-term borrowing costs soared the most in a year on Monday – a sign of liquidity shortages in the interbank market.
“The big injection will help alleviate liquidity pressure,” said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking. “It is necessary to help financial institutions move cross the year end smoothly.”
Liquidity conditions in China tend to tighten toward the end of the year, as banks hoard cash to prepare for regulatory checks. The PBOC reduced the reserve-requirement ratio earlier this month in an effort to keep cash supply ample and support the nation’s economic recovery from the pandemic. In its quarterly meeting, the central bank pledged to use monetary policy tools more “proactively” to support growth.
The seven-day repo rate had fallen rate by 15 basis points to 2.27 per cent on Tuesday afternoon, after soaring 52 basis points on Monday. The costs on the contracts of the same tenor in the exchange market dropped to 5.2 per cent, from the highest close since January in the previous session.
“The net injection will likely continue for the rest of this week,” said Peiqian Liu, China economist at NatWest Markets. With the PBOC’s rhetoric in December leaning toward the dovish side, signalling Beijing’s concerns about the near-term outlook on growth, China should be willing to use broad-based easing tools to aid the economy, she added.