Chinese central bank injected liquidity to the banking system via reverse repurchase agreements for ten consecutive days to meet cash demand prior to the week-long National Day holidays.
Market watchers believe the central bank’s open market operations and officials’ recent comments suggest that the priority for policymakers will be maintaining stability of market liquidity and they see a lower chance for more cuts in banks’ reserve requirement ratio (RRR) or cut in interest rates.
On Thursday, the last trading day before the National Day holiday between October 1 – 7, the People’s bank of China (PBOC) injected 100 billion yuan of liquidity to the banking system via 14-day reverse repo, while 60 billion yuan of reverse repo expired, leaving a net injection of 40 billion yuan.
That marks the 10th consecutive day for the central bank to conduct 14-day reverse repo and the 10th straight day of net liquidity injection, the longest streak since December 2020.
The central bank had injected 10 billion yuan liquidity via 7-day reverse rep in almost every trading day since March 2021. Since September 17, the PBOC started operations of a combination of 7-day and 14-day reverse repos. This week, the PBOC skipped 7-day reverse repo and injected a net 330 billion yuan via 14-day reverse repo.
Going forward, there will a large amount of Medium-Term Lending Facility (MLF) loans expiring in the rest of the year. Each month between August and December will see more than 500 billion yuan MLF loans mature. On September 15, the central bank injected 600 billion yuan of MLF loans to renew maturing MLF loans.
Since the PBOC announced a broad RRR cut on July 9, the market has been expecting more monetary easing given the mounting pressure from MLF loan maturity. However, PBOC officials’ recent comments have dampened the expectation for more easing in the near term.
Sun Guofeng, director of the PBOC’s monetary policy department, said at a press briefing on September 7 that the country will maintain prudent monetary policy and there is no shortfall in base money supply.
The RRR cut in July released about 1 trillion yuan long-term liquidity, part of which were used to repay some expiring MLF loans and financial institutions’ demand for liquidity was fully satisfied, he said.
Sun estimated that liquidity condition would remain largely balanced in the following months with no major funding gap and volatility expected. “Current conditions may not require as much liquidity as before to keep money market interest rates operating stably.”
In recent days, some market watchers called for interest rate cut to help deal with a possible liquidity crisis due to the cash crunch at property developers including China Evergrande Group.
Based on the PBOC’s recent open market operations, the chance for interest rate cut or a broad RRR cut is slim, said Zhong Zhengsheng, chief economist at Ping An Securities.
“The PBOC recently introduced 300 billion yuan re-lending for small and micro business and policy makers are about to introduce monetary policy tools targeted at carbon reduction. These moves are targeted adjustment for weak links in Chinese economy,” he said.
The central bank needs to consider price factors before cutting interest rates and prices of raw materials are still rising, he said. In addition, the US Federal Reserve will certainly start reduce asset purchases soon, which could bring shocks to emerging markets, he added.
“China’s monetary policy is under constraints from multiple sides and policymakers will likely use more structural tool to avoid send too big a signal of monetary easing,” he said.
Yi Gang, the governor of the PBOC, said in a speech earlier this month that China’s interest rate on 7-day reverse rep was 2.2 per cent, while the 10-year government bond yield is at 2.85 per cent, higher than the levels in all developed countries, but lower than all developing economies. “The interest rate level is ‘reasonable'”.
According to the central bank’s third-quarter monetary policy meeting on September 27, there are three constraints on China’s further monetary easing: inflationary pressure, the possible shock from the changes in overseas monetary policy and the fact that there is no need for too much monetary easing as China aims to stimulate the economy mainly with fiscal policies, said Ming Ming, chief fixed-income analyst at Citic Securities.
If the impact of maturity of MLF loans and reverse repurchase is excluded, the market is expected to see a liquidity gap of 600 billion yuan in October, said Ming.
Considering the pressure from the overseas market, inflationary pressue and the need for structural policy, the central bank will continue to maintain balance in market liquidity, but it’s unlikely to see an overall monetary loosening, he said.