China Easing Expected as $625 Billion ‘Liquidity Hole’ Opens Up

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China will cut the reserve requirement ratio and improve funding conditions this month, as liquidity tightens toward the Spring Festival holidays, the country’s largest securities firm says.

Fresh demand for funds will amount to nearly 4.3 trillion yuan ($625 billion) in January, according to Citic Securities Co. and Bloomberg calculations. Mainland residents will withdraw 1 trillion yuan of cash in preparation for the holiday, when money is gifted in red envelopes. Corporate tax payments and maturities of lenders’ interbank debt will also mop up liquidity, prompting authorities to step up cash injections.

“The People’s Bank of China will inject a significant amount of cheap funds to plug the liquidity hole,” said Ming Ming, Citic’s head of fixed-income research. Authorities will reduce the reserve requirement ratio and provide funding for lenders that make loans to private companies in January, he said.

China cut the amount of cash banks need to set aside as reserves four times last year as the nation struggled with slower economic growth, record corporate bond defaults and a trade war with the U.S. The latest easing sign came Wednesday evening, when the PBOC adjusted a rule to boost the impact of previous RRR cuts. China International Capital Corp. said that may release as much as 400 billion yuan of liquidity.

China’s interbank liquidity loosened this week after a seasonal squeeze at the end of the year, with the benchmark seven-day repurchase rate tumbling to the lowest level since August on Thursday. That helped fuel a rally in bonds: futures on sovereign notes due in a decade surged to the highest in more than two years.

This month, mainland lenders will pay back 822 billion yuan of short-term debt borrowed from each other, and another 390 billion yuan to the PBOC for its medium-term lending facility, according to Bloomberg calculations. Factors such as corporate tax payments will drain 1.2 trillion yuan, Citic said.

The PBOC will probably inject cash by conducting “sizable” reserve repurchase agreements with banks and lower the RRR in January, according to a note from Huachuang Securities Co. Some 4.5 trillion to 5 trillion yuan of liquidity will be withdrawn before the Spring Festival, analysts led by Ji Linghao wrote.

To contact Bloomberg News staff for this story: Tian Chen in Hong Kong at tchen259@bloomberg.net;Xize Kang in Beijing at xkang7@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Will Davies, Philip Glamann

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With assistance from Bloomberg