(Bloomberg) -- China’s central bank injected $70 billion worth of cash into money markets this month via a newly established policy tool, in a step to ease liquidity stresses in the fragile economy and encourage banks to lend.
The People’s Bank of China conducted 500 billion yuan of “outright reverse repurchase agreements” in October in order to safeguard reasonably amble liquidity in the banking system, it said in a statement Thursday. The agreements are for six months, the bank said.
This is the first time the monetary authority has disclosed its use of the tool unveiled earlier this week. The program allows the PBOC to buy a range of securities from primary dealers for a maximum of one year. Eligible securities include sovereign bonds, local government notes and corporate debt. The tool helps fill a gap in the central bank’s toolkit for injecting liquidity that has a longer term than the existing seven-day reverse repo.
The injection helps banks deal with a net drainage of 481 billion yuan in liquidity over the past three months via the PBOC’s one-year policy loans, known as the medium-term lending facility. That came as lenders’ funding pressure increased due to a decline in savings deposits as well as money being diverted to stocks from lower-yielding debt instruments.
Ensuring there’s sufficient liquidity in the market is key to helping the economy, which has been weighed by a lack of domestic demand and a persistent property crisis. China is expected to issue more government debt as part of a stimulus package, which could squeeze liquidity from the interbank market.
Adding to liquidity pressure, a large amount of MLF funds is coming due in the next two months.
Becky Liu, head of China macro strategy at Standard Chartered Plc, said the PBOC intended to provide additional liquidity that slightly more than offset the banks’ net repayment under the MLF program. She also pointed to the possibility that the new tool could be more prominent in ensuring there’s enough money in the economy.
“So far the tool is only able to mitigate a shrinkage of PBOC balance sheet due to MLF repayment, but in the future will play a larger role to facilitate balance sheet expansion by the PBOC and inject base money,” she said.
The size of the 500 billion yuan injection is equivalent to the effect of a 25-basis-point cut to banks’ reserve requirement ratio, which frees up cash for them to lend, according to Serena Zhou, an economist at Mizuho Securities. However, she said the cost of the funds would be higher than the money unleashed by RRR cuts.
The PBOC didn’t disclose the interest rate of the outright reverse repo tool in the statement.
The central bank also bought a net 200 billion yuan of sovereign bonds from the open market in October, it said in a separate statement.
The monetary authority has been revamping its policy framework with changes including the new reverse repo tool and a new program to buy and sell government bonds regularly. This shift could allow it to operate more like global peers and influence market borrowing costs more effectively.
As part of the transformation, the PBOC is downplaying the MLF program as its flagship policy tool to guide interest rates and provide liquidity, and instead relying on the seven-day reverse repo.
(Updates throughout.)
©2024 Bloomberg L.P.