The People’s Bank of China injected the most cash in almost three years in its open-market operations, helping ease a cash squeeze as the coming Chinese New Year holiday spurs demand for funds at a time when capital outflows are mounting.
The central bank said it conducted 110 billion yuan ($16.7 billion) of seven-day reverse-repurchase agreements and 290 billion yuan of 28-day contracts. That compares with 160 billion yuan of contracts that matured and resulted in a net cash injection of 315 billion yuan for this week’s two auctions. Other lending tools were used to add about 700 billion yuan this week for terms ranging from three days to a year.
China is trying to hold borrowing costs down to support its economy without spurring an exodus of funds that drove the yuan to a five-year low this month. Gross domestic product rose last year at the slowest pace in a quarter century and intervention to prop up the exchange rate led to a record $513 billion plunge in the nation’s foreign-exchange reserves. The Chinese New Year holiday -- a period for feasting and exchanging gifts -- will shut China’s financial markets throughout the week starting February 8.
“The market is a bit nervous and liquidity is also needed to cover the Chinese New Year,” said Frances Cheung, Hong Kong-based head of rates strategy for Asia ex-Japan at Societe Generale SA. “The fact that they are going for longer tenors on reverse repos and its MLF does add to market expectations for a delay in a reserve-ratio cut, which in itself could be linked to the currency market performance.”
The central bank injected 410 billion yuan into the banking system via three- and 12-month loans under its Medium-Term Lending Facility this week, while Short-term Liquidity Operations were used to add 55 billion yuan of three-day loans on Monday and another 150 billion yuan of six-day funds on Wednesday. The PBOC also auctioned 80 billion yuan of treasury deposits on behalf of the Ministry of Finance this week.
The overnight repurchase rate fell two basis points to 2.11 percent as of 10:01 a.m. in Shanghai, a weighted average from the National Interbank Funding Center shows. The comparable rate for 14-day loans between banks dropped 50 basis points to 2.80 percent, after jumping 48 basis points on Wednesday.
An estimated $843 billion of capital flowed out of China in the 11 months through November, according to a Bloomberg estimate, and policy makers are having to add funds to the financial system to prevent interest rates rising as money exits. Standard Chartered Plc says lenders’ reserve-requirement ratios will need to be cut to free up funds, even after this week’s cash injections.
"A RRR cut is still inevitable," said Ding Shuang, chief China economist at Standard Chartered in Hong Kong. "The capital outflows have been going on for months, it’s not a short-term issue."