China’s central bank is flooding the country’s financial system with cash to prevent a shortage as demand for funds picks up before the Lunar New Year holidays.
The People’s Bank of China (PBOC) added 440 billion yuan (US$66.84 billion) using reverse-repurchase agreements, the most in three years, bringing net injections via its various lending tools this month to about 1.6 trillion yuan. The central bank plans to arrange 1.6 trillion yuan of short-term funds and as much as 800 billion yuan of medium-term liquidity support, according to the transcript of a PBOC meeting posted on Sina.com on Friday last week.
Policymakers are trying to keep borrowing costs low to support economic growth while keeping the exchange rate stable at a time of record outflows. The overnight money rate climbed to a nine-month high last week before the Lunar New Year holidays that start in the second week of February. The central bank is seen to be reluctant to use measures such as cutting lenders’ reserve-requirement ratios to avoid adding pressure on the currency to weaken.
“The PBOC remains reluctant to conduct system-wide easing, such as RRR [required rate of return] cuts across the board, on the back of depreciation concerns and huge new loans in the first of couple weeks of the year,” Standard Chartered PLC Hong Kong-based strategist Becky Liu (劉潔) said. “The large amount of cash shows its firm determination to maintain accommodative money-market conditions, and to use short-term tools to boost liquidity.”
The overnight repo rate, a gauge of funding availability in the interbank market, fell for a fourth day, declining two basis points to 1.94 percent, a weighted average from the National Interbank Funding Center shows. It climbed to 2.18 percent on Wednesday last week — the highest since April.
The PBOC yesterday auctioned 360 billion yuan of 28-day reverse-repurchase agreements and 80 billion yuan of seven-day contracts. That is the biggest one-day offering since February 2013. The interest rates were unchanged at 2.6 percent and 2.25 percent, respectively.
The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, fell three basis points to 2.31 percent, data compiled by Bloomberg show. It touched 2.34 percent on Monday, the highest in almost three weeks.
The PBOC has added a net 905 billion yuan via open-market operations so far this month, and 612.5 billion yuan through its Medium-Term Lending Facility, data compiled by Bloomberg show. It also sold 80 billion yuan of treasury deposits on behalf of China’s Ministry of Finance last week, which also injects liquidity into the banking system.
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