China Injects Record Funds to Counter Tax, Holiday Cash Demand

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China’s central bank boosted injections via open-market operations to the most on record to meet seasonal demand for cash due to tax payments and major holidays.

The People’s Bank of China pumped in a net 560 billion yuan ($83 billion) into the financial system on Wednesday, the biggest one-day addition on record. The PBOC is offering reverse repos to maintain sufficient liquidity in the banking system during the peak season for tax payments, according to a central bank statement.

Funding costs have been rising, with the seven-day interbank repurchase rate climbing to about 2.65 percent from 2.21 percent on Jan. 8. Credit growth exceeded expectations in December, data showed Tuesday, after a raft of dismal economic numbers, including the biggest drop in the nation’s exports and imports since 2016.

The injection Wednesday also helps the PBOC in its endeavor to reduce banks’ funding costs. By offering funds via reverse repurchase agreements, at rates as low as 2.55 percent, the liquidity can substitute maturing funds previously offered via the Medium-term Lending Facility, which come at a higher cost.

"Traditionally, January is a peak month of tax payments, when liquidity demand is big," and Lunar New Year holidays are just two weeks away, said Ming Ming, head of fixed income research at Citic Securities Co. "Although total social financing and credit data yesterday was better than market consensus, the structure of China’s credit system is not in a good shape."

China Injects Record Funds to Counter Tax, Holiday Cash Demand

Ten-year government bond futures rose 0.4 percent, the first gain in six days, while the yuan slid 0.2 percent.

The PBOC usually offers extra liquidity ahead of the Spring Festival to avoid a credit squeeze as people rush to take out cash from bank accounts to prepare for family gatherings, gifts and travel, and companies also need to withdraw money from banks to pay tax.

Jan. 16 is the peak for tax payments, Citic’s Ming said. Exactly 12 months ago, the central bank injected a net 270 billion yuan to counter a similar demand for cash.

China has been taking measures to stabilize the economy, including cutting the reserve ratio for banks and cutting taxes, with further measures in the pipeline. China will avoid a ‘flood’ of liquidity, and will maintain a stable macro-leverage ratio, Zhu Hexin, deputy governor at the PBOC, said on Tuesday.

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