The Chinese central bank has released considerable liquidity into the banking system via multiple channels in the lead up to May.
On 24 April the People’s Bank of China announced the injection of 30 billion yuan into the market via seven-day reverse repos at a rate of 2.55%.
The move arrived just a day prior to to the launch of a 100 basis point reduction in the required reserve ratio for a range of Chinese lenders on 25 April, which is expected to unleash a total of 1.3 trillion yuan in liquidity.
PBOC has said that China’s stable, neutral monetary policy remains unchanged, and that the reserve ratio cut is intended to enable Chinese banks to pay back their medium-term lending facilities (MLF), as well as provide smaller institutions with funds for extending credit to micro-enterprises.
Wang Qing (王青), an analyst from Golden Credit Rating International, said to Securities Daily that the chief reason for PBOC’s liquidity injection just prior to launch of reserve ratio cut is a marked tightening of liquidity conditions in China.
On 23 April the exchange-traded short-term government bond repo rate saw a sharp spike, with overnight rates entering double digit territory and rising even higher than levels last seen before the Chinese New Year vacation.
Wang points out that the large volume of tax payments scheduled for the end of April has put pressure on liquidity, while current market tightness is to a considerable extent an “excessive reaction” to the announcement of targeted reserve ratio reductions by the central bank.
According to Wang pressure on funds is likely to ease significantly in the short-term, as tax payments come to an end, the reserve ratio cut takes effect, and end-of-month fiscal expenditures increase.
Given that Beijing is focusing on structural adjustments, expansion of domestic demand and improvements to the “quality” of China’s economic growth, Wang expects PBOC to engage in more “refined” management of liquidity, seeking to optimise the liquidity structure, as well as gradually align deposit rates and money market rates by raising the former and pressuring the later.