On Wednesday, the Chinese central bank increased liquidity support in the face of a cash crunch brought on by the approaching new year holiday by pumping an almost record amount of short-term funds into the banking system. The People’s Bank of China used seven-day reverse repurchase agreements to inject a net 958.4 billion yuan (HK$1018 billion) of cash into daily open market operations. This was the second-highest amount ever recorded, according to Bloomberg data dating back to 2004.
According to certain bond dealers, following the liquidity operation, market sentiment improved and cash conditions essentially stabilized. They also predicted that markets would smoothly weather the year-end. In the interbank market, the volume-weighted average rate of the benchmark seven-day repo was 2.237%, which was almost 18 basis points less than the closing average rate of 2.4156% the day before, which was the highest level since September 29.
The high cost of borrowing on the stock exchange, according to a trader at a Chinese bank, indicated that cash tension was structural because non-bank financial institutions, which typically rely on borrowing from large state-owned banks for funding, were forced to turn to the exchange market for cash at significantly higher rates.
Funds injected into system
On Thursday, the People’s Bank of China (PBOC) added 336.4 billion yuan (S$62.8 billion) in short-term money to the banking sector, after the previous session’s second-largest cash infusion ever. This was done to maintain a sufficient amount of liquidity and to counteract the effects of the medium-term lending expiration, the peak tax season, and the cash demand before to the Chinese New Year vacations, it stated. This year’s Chinese New Year holiday, which lasts for a week, starts on January 28.
The market may be disappointed by the seven-day liquidity, but there is still optimism for a longer-term liquidity injection later this month, according to OCBC strategist Frances Cheung. “We anticipate more liquidity injections the following week, but they might only be sufficient to meet demand and not necessarily significantly improve the situation.”
