China ramps up economic support with record cash injection

CHINA has ramped up its support for a nascent economic recovery, injecting a record amount of cash into its financial system to nip a squeeze in bank-borrowing costs.

The People’s Bank of China (PBOC) offered 835 billion yuan (S$162.7 billion) of cash via seven-day reverse repurchase contracts on Friday (Feb 17). This resulted in a net injection of 632 billion yuan, the largest one-day addition on record in data going back to 2004. Earlier this week, the central bank had just pumped one-year money into the system.

The operations came after a gauge of interbank funding costs soared to their highest in two years last week; those costs have remained elevated since.

Supporting growth became China’s top priority after policymakers abruptly dismantled Covid restrictions late last year. But, as the end of the zero-Covid policy lifted consumption and demand for loans, it also created a liquidity shortage that threatens China’s sustained recovery. 

All this has put the PBOC in a bind. While it needs to ease policy to replenish cash in the banking system, it cannot do so aggressively, or risk placing China too far apart from its hawkish global peers. A major policy divergence could weaken the yuan and reignite foreign capital outflows, which were at their worst in the bond market in 2022.

Northeast Securities analyst Chen Kang said: “The move is a reflection of the PBOC’s unswerving stance to keep liquidity ample. Funding in the money market turned tighter yesterday, and we see the net injection as an immediate and efficient response.”

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Liquidity conditions have tightened of late, amid a recovery in loan demand and economic activity. Official data last week showed that Chinese banks made 4.9 trillion yuan of new loans in January, the highest on record.

A looming record maturity wall of interbank debt – known as non-negotiable certificates of deposit (NCDs) – is making the situation more complicated. Data compiled by Bloomberg showed that some 5.9 trillion yuan of the notes are due by the end of March, an all-time high on a quarterly basis. These will need to be refinanced.

Despite Friday’s cash infusion, the overnight repo rate – an indicator of interbank funding costs – rose for a fourth straight day to 2.1 per cent.

Stock benchmarks in China and Hong Kong were lower in early trading, but fared better than the decline in the regional equities gauge. The onshore yuan fell 0.3 per cent, while 10-year government bond yields were little changed.

Earlier this week, the PBOC injected 199 billion yuan of one-year funding via its medium-term lending facility, though it refrained from slashing the interest rate on the policy tool. 

But analysts said that a more aggressive easing move – such as cutting the reserve ratio or policy rate – cannot be ruled out in the coming months. China’s property sector is still struggling and exports have weakened, while the strength of the rebound in consumption is uncertain.

Guosheng Securities analyst Yang Yewei said: “If the PBOC refrains from applying more permanent liquidity tools such as cutting the required reserve ratio, it may have to engage in frequent open-market operations of large amounts going forward.”

The central bank vowed to implement “targeted and forceful” monetary policy this year, with a focus on boosting domestic demand. 

Frances Cheung, a rates strategist at OCBC, noted: “Today’s liquidity injection reflects that the PBOC is supportive of liquidity in view of market demand. Liquidity demand may stay on the high side in the coming weeks on heavy NCD maturities, potential additional inflows in yuan assets, and recovery in loan demand.” BLOOMBERG