China rushes nearly $156bn into banks in just two weeks

Bloomberg

China is pushing almost a trillion yuan ($156 billion) of funds into the banking system in just two weeks, reinforcing a signal that it will use short-term liquidity to sustain growth rather than ease monetary policy.
In a pattern seen also in September, the People’s Bank of China (PBOC) has been injecting huge amounts of cash through open-market operations to cope with month-end needs — this time, it’s for corporate tax payments and local debt issuances.
The rush of short-term liquidity comes as policymakers in China seek to sustain economic growth without stoking rising inflation. While the PBOC cut reserve requirement ratio in July to fuel speculation of further easing, it has shown little signs that more cuts are on the way, suggesting that more such cash injections will be used for the rest of the year.
“It’s to ensure ample short-term liquidity in the financial system with plenty of coupons and principal payments from high-yield property issuers” due, said Tommy Ong managing director for treasury and markets at DBS Hong Kong Ltd. “On the other hand, the PBOC doesn’t want to be seen as blocking yuan strength by adopting more aggressive policies such as an across-the-board RRR cut, or even a rate cut.”
The net injection of some 940 billion yuan in the past two weeks is the most since January 2020, according to data compiled by Bloomberg. Regional authorities are scheduled to sell 544 billion yuan of bonds by this week, the second-largest weekly issuance in history, data compiled also shows.
Meanwhile, China’s overnight borrowing costs declined as the central bank continued to add cash to a banking system strained by tax payments, local-government debt issuance and fading monetary easing hopes.
The overnight interbank repo rate falls seven basis points to 1.54%, lowest since September 29 and near a nine-month low. The PBOC injected a net $30 billion into the financial system through seven-day reverse repurchase agreements for a second straight day, which was the biggest single-day addition since January.
The cash injections have dampened hopes of a reduction in banks’ reserve requirement ratios, keeping borrowing costs elevated. That’s because policymakers are seeking to strike a balance between boosting an economy hit by new Covid-19 outbreaks and China Evergrande Group’s debt crisis, and keeping inflation anchored.

“These operations help soothe the market,” said Frances Cheung, rates strategist at Oversea-Chinese Banking Corp in Singapore. “Still, this is short-term money while the liquidity tightness is due to longer-term/permanent payment needs.”
The downside for local rates is limited unless there is a provision of longer-term liquidity, Cheung added.
China’s overnight rate declined for a fifth straight session, a stretch matched by PBOC cash additions. However, the seven-day borrowing rate remains elevated, reflecting liquidity tightness covering the month-end period.
The cash injections have dampened hopes of a reduction in banks’ reserve requirement ratios, keeping borrowing costs elevated. That’s because policymakers are seeking to strike a balance between boosting an economy hit by new Covid-19 outbreaks and China Evergrande Group’s debt crisis, and keeping inflation anchored.
“Overall we don’t see excessive liquidity injections beyond the seasonal demand and expect the PBOC to return to a liquidity drain at the beginning of November,” said Liu Peiqian, China economist at Natwest Markets Plc in Singapore.