China Boosts Cash Injection Amid Maturity Wall, Growth Risks

(Bloomberg) -- China unexpectedly boosted the injection of short-term cash into the banking system as record amount of policy loans come due and Premier Li Keqiang flags challenges to the nation’s growth.

The People’s Bank of China added 50 billion yuan ($7.8 billion) in the financial system with seven-day reverse repurchase agreements, after injecting 10 billion yuan per day in the last two sessions. While the operation still led to a net liquidity drainage after considering maturities, it signals that authorities have grown concerned about a potential cash tightness in the coming weeks.

This month, lenders have to repay the PBOC a record 1 trillion yuan of medium-term loans injected last year following a series of defaults by state-owned companies. Banks also need to set aside cash to buy bonds sold by local governments. Meanwhile, Premier Li said the economy faces new downward pressures and tax cuts are needed to help small and medium-sized firms.

“The move amid growth headwinds could help prevent funding costs from rising further and keep bond yields relatively low,” said Ming Ming, head of fixed-income research at Citic Securities Co. “But still, the market should not anticipate more radical easing from the PBOC like a reserve-ratio cut, considering that the Federal Reserve is tapering.”

While major global central banks are under pressure to roll back stimulus, the PBOC has had to balance the risk of rising inflation while boosting its economy weighed by power shortages and Covid-related curbs. 

It has relied on occasional increases in reverse repo injections since July, instead of another cut in the reserve requirement ratio, said Stephen Chiu, Asia FX & rates strategist at Bloomberg Intelligence. The RRR cut looks even less likely now, he said.

Wednesday’s injection is also noteworthy as the PBOC typically keeps cash additions at 10 billion yuan in the beginning of the month, before raising it at month-end to meet a seasonally high demand for liquidity. It injected almost one trillion yuan of funds into the banking system in just the last two weeks of October as a surge in local bond sales and tax payments strained liquidity. 

The overnight repurchase rate, a gauge of short-term interbank funding costs, fell 12 basis points to 1.99%. The yield on 10-year government bonds fell to as low as 2.91%, the lowest level in more than three weeks.

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With assistance from Bloomberg