Central Bank Makes Sizeable Injection to Ease Lunar New Year Liquidity Pressure

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The Chinese central bank hopes to smooth over potential liquidity issues in the wake of the lunar new year with sizeable liquidity injections via open market operations.

On 26 February the People’s Bank of China made a net injection of 150 billion yuan into the banking system, via 100 billion yuan in 7 day repos, 30 billion yuan in 28 day repos and 20 billion yuan in 63 day repos, with rates of 2.50%, 2.80% and 2.95% respectively.

The rates for these repos are on par with PBOC’s previous round of open market operations.

The Chinese central bank said that the move was intended to offset the impact of financial institutions making their reserve requirements, which were deferred to 26 February from 25 February due to the impact of the traditional holiday season.

Market observers have also expressed concern about the expiration of the contingent reserve arrangements (CRA) that PBOC used to shore up liquidity before the Chinese New Year by allowing lenders to dial back their reserve requirements.

Data from PBOC indicates that a total of 2 trillion yuan in CRA are set to mature during the period from 22 February to 16 March, after national commercial banks in China commenced usage of 30-day CRA’s in mid-January.

In addition to this 243.5 billion yuan in medium-term lending facilities (MLF) expired during the period from 15 – 22 February.

PBOC has already taken advance precautions against this potential liquidity pressure, with the launch of 393 billion yuan in MLF on 13 February, and 350 billion yuan in repo agreements on 22 February.

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