China central bank offers salve to jittery markets with surprise cash injection

[SHANGHAI] China's central bank surprised markets on Monday with an injection of medium-term cash into the banking system, in what traders and analysts viewed as a move to calm nerves rattled by a string of recent bond defaults.

The People's Bank of China (PBOC) injected 200 billion yuan (S$40.68 billion) through one-year medium-term lending facility (MLF) loans to financial institutions on Monday, it said in a statement. The bank kept the rate on the loans unchanged from the previous such injection, at 2.95 per cent.

The PBOC also said it would conduct another MLF operation on Dec 15 to roll over maturing loans for December, with volume dependent on market demand.

No MLF loans are set to expire on Monday. The PBOC injected 800 billion yuan in MLF loans into the financial system on Nov 16.

"No one expected the MLF injection today as the PBOC had said the mid-November operation was a one-off rollover for the month," said a trader at a foreign bank in Shanghai.

While the injection came as a surprise, Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong, said that it followed from regulatory efforts to stabilise market expectations following a series of bond defaults, including a recent meeting of China's Financial and Stability Development Committee (FSDC) that vowed "zero tolerance" for misconduct.

"(The PBOC) has to inject funds starting now to match increasing cash demand toward the year-end as the SOE (state-owned enterprise) defaults really had a huge impact on the market," he added.

Following the injection, one-year dollar/yuan swap points fell to 1,680 points, the lowest level since Nov 5, indicating looser liquidity levels.

Benchmark 10-year Chinese government bond futures for March delivery, the most-traded contract, rose 0.33 per cent.

Monday's MLF loans were issued alongside 150 billion yuan injected via reverse repurchase operations. With 30 billion yuan of reverse repos maturing on Monday, that made for a net injection of 110 billion yuan on the day.

New data showing China's factory activity grew at its fastest pace in more than three years indicated policymakers have room to taper policy, said Larry Hu, economist at Macquarie Capital in Hong Kong, though the pace will be gradual.

"The PBOC doesn't want to tell the market that we're going to have another big liquidity spree, but they don't want to create a credit crunch either. So it's kind of the art of policy."

REUTERS