SHANGHAI — China’s central bank ramped up cash injections into the banking system on Thursday, while keeping an interest rate on the medium-term policy loans unchanged for the fourth straight month, to keep liquidity conditions ample towards the year-end.
The People’s Bank of China (PBOC) said it was keeping the rate on 650 billion yuan ($93.53 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions unchanged at 2.75% from the previous operation.
In a poll of 24 market watchers conducted this week, 20 participants predicted the PBOC would keep the interest rate on the one-year MLF unchanged. Six believed the central bank would inject fresh funds exceeding the maturity.
With 500 billion yuan worth of MLF loans set to expire on the same day, the operation resulted in a net 150 billion yuan fresh fund injection into the banking system.
Xing Zhaopeng, senior China strategist at ANZ, said the higher cash offerings were to alleviate commercial banks’ long-term liability cost and counteract recent higher cash demand.
“The pressure from wealth management product redemptions and surges in interest rates on negotiable certificates of deposits (NCDs) indicated tight liquidity conditions,” Xing said.
The rate on one-year AAA-rating NCDs, a gauge that measures the short-term interbank borrowing costs, has jumped about 27 basis points this month to 2.78%, surpassing the one-year MLF rate.
Traders and analysts attributed the higher money rates to Beijing’s most significant relaxation of its COVID-19 controls since the pandemic erupted three years ago, as investors switched into riskier assets from bonds.
Separately, others also pointed out that the traditional peak season for cash was also looming.
“The higher cash injection this month may be a signal that the central bank would maintain ample liquidity before the Lunar New Year holidays,” said Marco Sun, chief financial market analyst at MUFG Bank (China), noting China’s biggest festival falls in the second half of January.
Chinese companies and households usually have higher cash demand for various payments, bonus handouts and administrative requirements towards the year-end and Lunar New Year holidays. These needs would suck money out of the banking system.
The central bank also injected 2 billion yuan through seven-day reverse repos while keeping borrowing costs unchanged at 2.00%, it said in an online statement.
The PBOC cut the amount of cash banks must set aside as reserves earlier this month to support an economy hurt by COVID-19 shocks. ($1 = 6.9498 Chinese yuan) (Reporting by Winni Zhou and Brenda Goh; Editing by Jacqueline Wong)