PBOC injects US$111 billion of liquidity as bond supply surges
The injection would help ease funding pressure in the market
CHINA boosted its cash injection into the banking system via a recently launched policy tool this month, in a move to ensure sufficient liquidity amid a surge in local government bond sales.
The People’s Bank of China conducted US$111 billion of outright reverse repurchase agreements in November, it said in a statement on Friday (Nov 29). The contracts are for three months and are aimed at safeguarding reasonably ample liquidity in the banking system, according to the statement. That exceeded the 500 billion yuan (S$92.5 billion) injected last month.
In a separate statement, the central bank said it bought a net 200 billion yuan of sovereign bonds from dealers in November. The aim was also ensuring plentiful cash supply, the PBOC said.
The injection would help ease funding pressure in the market, after China kicked off a US$1.4 trillion programme to help local governments cope with their off-balance-sheet debt by allowing them to sell more bonds. That means banks, the main investors in these securities, would need more cash to absorb the higher debt supply and at the same time keep lending to consumers and businesses.
China’s economy improved thanks to a stimulus blitz unleashed at the end of September, with consumption boosted by government subsidies. While the country is expected to achieve this year’s growth target of around 5%, it’s still contending with thorny longer-term problems including entrenched deflation and a potential trade war with the US.
The PBOC has embarked on a transition of its policy toolbox earlier this year in order to influence market borrowing costs more effectively and to better coordinate with fiscal policy. As part of the shift, it began trading government bonds in August and launched the outright reverse repo tool last month.
These programmes are expected to play a major role in managing liquidity in the future, at the same time older tools like the medium-term lending facility are being downplayed. The PBOC drained a net 550 billion yuan of one-year cash in November via medium-term lending facility (MLF).
Some analysts have argued the possibility that the PBOC may have bought local government bonds via the outright reverse repo programme in October. The tool allows the PBOC to purchase securities including sovereign bonds, local government notes and corporate debt from financial institutions, and sell them back at an agreed time in future. BLOOMBERG
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