China Injects Most Cash in Two Months, Triggering Gains in Bonds
China boosted its injection of short-term cash into the banking system to the highest in two months, as demand for liquidity climbed before year-end. Government bonds gained.
The People’s Bank of China added 200 billion yuan ($31 billion) of cash into the financial system through seven-day reverse repurchase agreements, more than offsetting the 10 billion yuan coming due. The yield on 10-year government bonds fell to 2.795%, the lowest level since June 2020.
The PBOC’s operation came after an indicator for short-term borrowing costs soared the most in a year on Monday, a sign of liquidity shortages in the interbank market. The supply of cash tends to tighten toward the end of the year, as banks hoard cash to prepare for regulatory checks.
“The big amount of injection will help to alleviate liquidity pressure,” said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group Ltd. “It is necessary to help the financial institutions to move cross the year-end smoothly.”
Earlier this month, the PBOC reduced the reserve-requirement ratio in an effort to keep cash supply ample and support the nation’s economic recovery from the pandemic. In its quarterly meeting, PBOC pledged to use monetary policy tools more “proactively” to support growth.
The seven-day repo rate fell 13 basis points to 2.29% as of 5:07 p.m. local time, after soaring 52 basis points on Monday. The costs on the contracts of the same tenor in the exchange market dropped to 5.16%, from the highest close since January in the previous session.
“The net injection will likely continue in the rest of this week,” said Peiqian Liu, China economist at Natwest Markets. With PBOC’s rhetoric in December leaning toward the dovish side, signaling Beijing’s concerns over the near-term outlook on growth, China should be willing to use broad-based easing tools to aid the economy, she added.
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