China injects most cash in 2 months as demand for fund jumps

[BEIJING] China boosted its injection of short-term cash into the banking system to the highest in 2 months, as demand for liquidity climbed before year-end.

The People's Bank of China (PBOC) added 200 billion yuan (S$42.5 billion) of cash into the financial system through 7-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 (Dec 27), a sign of liquidity shortages in the interbank market.

"The big amount of injection will help to alleviate liquidity pressure," said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group. "It is necessary to help the financial institutions to 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, PBOC pledged to use monetary policy tools more "proactively" to support growth. The 7-day repo rate fell 15 basis points to 2.27 per cent as of 1.45 pm local time, 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 in the rest of this week," said Peiqian Liu, China economist at Natwest Markets. With PBOC's rhetoric in December leaning toward the dovish side, signalling Beijing's concerns over the near-term outlook on growth, China should be willing to use broad-based easing tools to aid the economy, she added.

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