China steps up cash support as growth recovery mops up liquidity
CHINA injected the biggest amount of cash to its financial system in more than two years via medium-term loans, as a surge in demand for credit as the economy recovers boosted the risk of a liquidity squeeze.
The People’s Bank of China (PBOC) added a net 281 billion yuan (S$54.8 billion) via its medium-term facility this month, the most since December 2020. The move comes as a gauge of short-term borrowing costs climbed back towards a two-year high, a reflection of tighter liquidity conditions in the interbank market.
Wednesday’s (Mar 15) operation received special attention as it was China’s first monetary decision since its national congress last week, where it set a modest growth target and revamped its financial regulators. The shock failure of Silicon Valley Bank (SVB) and other small US lenders over the past few days has also complicated the outlook for global central banks’ policy plans.
China’s latest data on factory output and retail sales suggest its economic recovery from the pandemic is on the right track. That means the PBOC is walking a fine line — while the central bank has to pump in enough cash to fund growth, it also needs to avoid too big a policy divergence from global peers.
“This is more of a demand driven injection and we still see the possibility for an additional reserve ratio cut,” said Becky Liu, head of China macro strategy at Standard Chartered. “The current economic recovery remains highly fragile, with many private sector and smaller entities far from out of the woods. More supports will be needed until these entities are on firmer footings.”
The PBOC’s net injection on Wednesday was more than the 199 billion yuan provided in February. Economists surveyed by Bloomberg had forecast a net addition of 125 billion yuan for March. The MLF borrowing rate was maintained at 2.75 per cent on Wednesday, as expected.
The overnight repurchase rate, an indicator for interbank funding costs in China, climbed 27 basis points to 2.09 per cent, while the offshore yuan was little changed at 6.8757 per dollar. Regional currencies such as the Korean won and Australian dollar gained.
Retail sales rose 3.5 per cent from the same period last year, figures from the National Bureau of Statistics showed on Wednesday, reversing from a 1.8 per cent drop in December. Industrial output grew 2.4 per cent in the two-month period. Also, strong credit data last week showed demand for loans continued to recover in February.
The growth outlook remains uncertain though, giving policymakers reason to add liquidity support. Exports continue to fall, the property market remains weak, and local governments are saddled with high debt.
“The liquidity injection reflects the ongoing need to support the economy, despite recent sentiment and loan data improvement,” said Gary Ng, an economist at Natixis. “However, the unchanged rate still shows China is cautious about financial risks, especially after the US SVB-related saga.” BLOOMBERG
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