China Injects $72bn in Money Markets to Meet Holiday Demands for Cash
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China’s central bank pumped a record 450 billion yuan ($72 billion) into money markets on Tuesday after the benchmark borrowing rate climbed to a three-week high as the demand for cash spiked ahead of the weeklong Lunar New Year festivities.
The short-term liquidity injection was carried out via regular open market operations using a 14-day reverse bond repurchase agreement, which means the money will drain out of the system in two weeks.
China’s central bank pumped a record 450 billion yuan ($72 billion) into money markets on Tuesday after the benchmark borrowing rate climbed to a three-week high as the demand for cash spiked ahead of the weeklong Lunar New Year festivities.
The short-term liquidity injection was carried out via regular open market operations using a 14-day reverse bond repurchase agreement, which means the money will drain out of the system in two weeks.
While the injection in itself does not constitute any major shift in monetary policy, analysts said the effort largely underscores how the Chinese central bank has honed its use of open market operations in recent months to ensure a stable money supply.
Liquidity typically tightens with the approach of the Lunar New Year festivities; when companies rush to pay out cash gifts and bonuses and individuals withdraw cash to spend on gifts and travel.
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Some traders had earlier speculated that the central bank might be forced to tinker with the reserve requirement ratio – the amount of cash holdings banks are required to keep – in order to prevent a liquidity squeeze.
As expected, the benchmark money rate had begun moving upward as the holidays approached, but Tuesday’s massive injection has signalled to the market the bank’s determination to keep rates in check by lowering the price of money.
Frances Cheung, a strategist at Credit Agricole CIB said it appears that Beijing has found the right formula to keep money rates relatively stable. In a research note, she wrote:
[quote] We have not seen the spikes in repo rates that we usually did see ahead of the Chinese New Year, likely upon willingness from the PBOC to provide liquidity. [/quote]
Lu Ting and Zhi Xiaojia, economists with Bank of America Merrill Lynch, agreed. “Since early 2012 we noticed that the People’s Bank of China has put much more emphasis on stabilising interbank rates and has become much more flexible in using a variety of monetary tools to deliver stable rates,” they wrote in a note to clients.
In January, the central bank had announced that it would allow the use of short-term liquidity operations as a supplement to regular open market operations, which were previously restricted to Tuesdays and Thursdays.
According to Liu Na of CNC Asset Management, this move could eventually lead to lower excess bank reserve holdings.
“With the People’s Bank of China able to offer liquidity on a more frequent basis to counter temporary shortages, the need to carry excess reserve is reduced,” he told the FT, forecasting that banks could reduce their excess reserve holdings from 2 to 1 percent.
China markets will be closed for a week starting on February 9 for the Lunar New Year holidays.
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