China's central bank injects liquidity to reduce cash pressure

China's central bank injects liquidity to reduce cash pressure

Monetary authorities seem to have joined the holiday spending spree by offering "red envelopes" worth billions of dollars to financial institutions to avert a seasonal liquidity crunch ahead of the Lunar New Year, which starts next week.

Increased demand for cash for year-end bonuses to employees and preparing red envelopes for friends and relatives, as well as last-minute holiday shopping, has banks under pressure to meet the demand.

The People's Bank of China on Thursday injected 160 billion yuan ($25.6 billion) through 14- and 21-day reverse repurchase arrangements at interest rates of 4.1 and 4.4 per cent, respectively.

Reverse repos involve the central bank purchasing securities from banks, thereby injecting cash into the system.

With these transactions, the PBOC has injected a net 205 billion yuan into the financial system this week, the largest one-week liquidity injection by the central bank since January 2014.

The seasonal cash pressure on banks is being exacerbated by a wave of initial public offerings that will tie up huge funds, according to a Bloomberg survey

Analysts said that the PBOC's moves have not caused money market rates to drop substantially, indicating the central bank's objective is to ensure sufficient money supply rather than providing a flood of cheap money.

"The main purpose of the recent liquidity accommodation is to prevent financial risks caused by cash flow problems among financial institutions," said Zhou Xi, an analyst at Bohai Securities Co Ltd.

To ensure sufficient funds in the money market during the holiday season, the central bank also expanded the short-term lending arrangement, known as the Standing Lending Facility, to smaller city and rural financial institutions on a national basis.

The SLF, created by the central bank in 2013 to provide liquidity to national commercial and policy banks, was previously limited to 10 provinces and cities.

Compounded by holiday demand and IPOs, interest rates in the money market will unavoidably edge higher in the short term. But in the longer term, the PBOC's monetary policy will continue to be guided by the principle of stabilizing money supply, Zhou said.

Chang Jian, chief China economist at Barclays Plc, said that slower GDP growth and the decline in inflation should prompt the PBOC to ease monetary policy further.

Chang characterized the recent easing as a "reluctant" move by policymakers who must weigh the need for further accommodation against the risk of fueling asset bubbles and delaying needed structural adjustments.

Chang said that additional easing could not be ruled out if inflation continued to decline or GDP growth kept weakening.

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