China's Money-Market Operations Inject Most Cash in Three Years

Updated on
  • PBOC's reverse repos add a net 590 billion yuan this week
  • Extra funds help meet pre-holiday surge in demand for money

China’s central bank used this week’s two money-market operations to add the most funds to the financial system in three years, helping to prevent a cash crunch as money demand picks up before the week-long Lunar New Year holiday.

The People’s Bank of China said it auctioned 340 billion yuan ($52 billion) of reverse-repurchase agreements on Thursday, after offering 440 billion yuan two days earlier. The week’s net injection of 590 billion yuan so far was the biggest since February 2013, data compiled by Bloomberg show.

Policy makers are trying to keep borrowing costs from rising as they contend with the slowest economic growth in a quarter century and record capital outflows that drove the yuan to a five-year low this month. Short-term lending tools are being used in preference to a more permanent loosening of monetary policy as the PBOC seeks to avoid exacerbating an exodus of funds that’s led to costly intervention in support of the exchange rate. Yuan purchases drove a record $108 billion slide in the nation’s foreign-exchange reserves in December alone.

“The huge amount of open-market injections are targeting the pre-holiday cash demand,” said Liu Changjiang, a bond analyst at Soochow Securities Co. in Shanghai. “As the central bank has become less willing to cut reserve-requirement ratios, such short-term funds are only keeping the money market tightly balanced.”

The benchmark seven-day repurchase rate, a gauge of interbank liquidity, was little changed at 2.31 percent Thursday, a weighted average from the National Interbank Funding Center shows. The one-month Shanghai Interbank Offered Rate climbed for a sixth day, rising four basis points to 3.13 percent, the highest level since July.

The central bank will conduct open-market operations every work day from Jan. 29 through Feb. 19, according to a statement posted on its website Thursday afternoon. Government offices will be closed Feb. 7-13 for the Lunar New Year holidays. The central bank also said it will allow seven more lenders to participate in its Short-term Liquidity Operations.

Demand for cash surges in the run-up to the break as people stockpile funds to pay for trips, feasts and gifts. Huachuang Securities Co. estimates the sum involved is close to 2 trillion yuan. Quarterly tax payments will siphon off some 300 billion yuan in addition to the average monthly drain of about 700 billion yuan stemming from capital outflows, the brokerage said.

The central bank added a net 1.8 trillion yuan into the financial system this month, including 1.135 trillion yuan via open-market operations and 612.5 billion yuan via its Medium-term Lending Facility, data compiled by Bloomberg show. The PBOC plans to arrange 1.6 trillion yuan of short-term funds and as much as 800 billion yuan of medium-term liquidity support, according to the transcript of a PBOC meeting posted on Friday.

Post-holiday Concern

“The next issue would be the liquidity condition after the holidays, as the withdrawal of such huge funds will probably tighten the market and this will at least affect sentiment,” Soochow’s Liu said.

The central bank conducted 80 billion yuan of seven-day reverse repos and 260 billion yuan of 28-day contracts on Thursday, and kept the interest rates unchanged at 2.25 percent and 2.6 percent, respectively. That compares with 110 billlion yuan of seven-day agreements that matured.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, fell three basis points to 2.33 percent, data compiled by Bloomberg show. It rose to 2.37 percent Wednesday, the highest since Dec. 31. The yield on sovereign bonds due October 2025 declined three basis points to 2.88 percent, according to National Interbank Funding Center prices.

— With assistance by Helen Sun

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