China set to add liquidity support to stave off cash squeeze
CHINA will probably add more cash into the financial system this week as the largest amount of policy loan in a year come due. Some market watchers also expect a near-term reduction in banks’ reserve requirement ratio.
The People’s Bank of China (PBOC) will offer 950 billion yuan (S$179.8 billion) through the medium-term lending facility Wednesday, according to the median estimate of 10 analysts in a Bloomberg survey. That would exceed the 850 billion yuan maturing this month. Most economists expect the one-year policy interest rate to remain unchanged at 2.5 per cent.
Liquidity conditions have tightened as a deluge of bond issuance to fund fiscal stimulus, along with year-end cash demand from corporates, drove up money market rates. A spike in short-term borrowing costs late last month rattled markets, putting pressure on the PBOC to keep funding costs stable and facilitate the economic recovery.
Should the liquidity infusion prove modest, expectations that Beijing will reduce the amount that banks have to set aside as reserves may gather traction. Even if the PBOC offers around one trillion yuan as some economists project, which would be the most since 2021, the net injection will still trail that of the previous month due to maturing loans.
Mizuho Securities Co and ANZ Bank China are among those expecting a reduction in the required ratio in the coming weeks.
“The odds for an imminent reserve-requirement ratio cut is very high given structurally tight funding on the back of recent stronger primary issuance and to facilitate smooth issuance of upcoming special government bonds,” said Becky Liu, head of China macro strategy at Standard Chartered in Hong Kong. “The PBOC will watch out for liquidity stress more carefully given the episode at end-October.”
A reduction of 25 basis points in the required ratio would release around 500 billion yuan into the financial system, according to Bloomberg Intelligence. BLOOMBERG
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