PBOC Dials up Short-Term Liquidity Injections Amid Cash Squeeze

(Bloomberg) — China’s central bank pumped a large amount of short-term cash into its financial system on Wednesday, dialing up liquidity support amid a cash squeeze with the new year holiday looming.

The People’s Bank of China injected a net 958.4 billion yuan ($131 billion) of cash via seven-day reverse repurchase agreements in daily open market operations, the second highest on record in data compiled by Bloomberg going back to 2004. 

The sizable liquidity support will come as a relief for Chinese lenders after a cash crunch earlier this week pushed seven-day interbank funding rates to the highest in more than a year. The PBOC’s increasing determination to defend the under-pressure yuan has led to fears it may be restrained in providing sufficient liquidity support for the economy.

Chinese Banks Face Cash Squeeze as Yuan Defence Adds Pressure

The reverse repurchase agreements in part replaced a monthly expiry of medium-term financing of about 955 billion yuan. The PBOC in recent months has been shifting away from the so-called MLF and its rate as the main policy tool, shifting instead to the seven-day reverse repo rate to guide market borrowing costs. 

The MLF operation date has been delayed to later each month and the PBOC typically uses reverse repo to moderate money market volatility in between MLF maturities and new operations.

China will use monetary tools such as interest rates and the reserve requirement ratio to keep liquidity ample, PBOC Deputy Governor Xuan Changneng said at a press briefing on Tuesday. 

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