China Adds Most Cash Since January This Week Amid Tax Season

(Bloomberg) -- China has used open-market operations to add the largest amount of cash to the banking system since January so far this week, as lenders’ demand for liquidity surged during the tax payment season.

The People’s Bank of China net injected 560 billion yuan ($79 billion) through reverse repurchase contracts in the four sessions through Thursday, exceeding the amount it granted during tax season last year. A gauge of overnight interbank borrowing costs dropped from a three-month high on the cash additions, which also helped soothe a nervy bond market. The yield on 10-year sovereign notes stabilized after soaring to the highest since July amid receding easing bets.

But next week, the injections will morph into a liquidity challenge for lenders as they need to repay the funds and hoard even more money for month-end regulatory checks. That will soon prompt officials to use a targeted tool to inject one-year cash, according to Jianghai Securities Co. Beijing refrained from doing so this week, while some market watchers expected a move.

“It’s a good window for the PBOC to conduct targeted medium-term lending facilities next week,” said Ji Linghao, an analyst at Jianghai. The tool is used to “iron out swings in liquidity conditions, and it does not carry a strong easing signal.”

The overnight repo rate plunged 19 basis points, extending its two-day decline to 36 basis points, to 2.45% as of 4:42 p.m. in Shanghai. The yield on 10-year government bonds stood at 3.22%.

--With assistance from Wenjin Lv.

To contact the reporter on this story: Tian Chen in Hong Kong at tchen259@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Kevin Kingsbury, Fran Wang

©2019 Bloomberg L.P.