PBOC adds cash to ease liquidity stress with rate unchanged

19 Aug, 2020 07:33
source: Bloomberg

Singularity Financial Hong Kong August 17, 2020 – China’s central bank supplied liquidity to commercial lenders on Monday to help them manage upcoming government bond sales, while leaving the price of the money unchanged as the economy recovers.

The People’s Bank of China added 700 billion yuan ($101 billion) of one-year funding via the medium-term lending facility. The central bank said Friday that today’s operation is meant to offset the 400 billion yuan in loans coming due Monday and another 150 billion yuan maturing on Aug. 26.

With the economy recovering slowly, the PBOC is trying to provide markets enough funding to purchase government bonds and make loans without fostering financial risks. In addition to Monday’s money, the central bank last week offered the most short-term funds since May, replenishing a banking system which needs about $500 billion this month.

The net injection indicates “a more accommodative stance on keeping liquidity levels ample” so that commercial banks can continue to support bond issuance and to stabilize credit growth, said Liu Peiqian, a China economist at Natwest Group Plc. in Singapore. The move is “a signal to ensure policy continuity and stability” rather than a reaction to a slower pace of economic recovery, she said.

The PBOC kept the interest rate on the funds unchanged at 2.95%. The yield on China’s 10-year government bonds fell 1 basis point to 2.93%.

“The MLF injection is larger than expected,” said Ming Ming, head of fixed-income research at Citic Securities Co. in Beijing. “The PBOC’s overall neutral monetary policy has an easing bias in August. I expect the 10-year government yield to drop to around 2.8%.”

Stocks on the mainland and in Hong Kong climbed on the injection. The benchmark Shanghai Composite Index jumped 2.3%, the largest advance in nearly a month, while the Hang Seng Index rose 1.3%.

The PBOC wants to control the nation’s rising leverage ratio. China’s top banking regulator Guo Shuqing warned about financial risks and rising debt in an article published over the weekend. Guo is also the PBOC’s deputy governor and head of the Communist Party at the bank.

“For markets, the most tight moment in liquidity is over,” said David Qu, an economist at Bloomberg Economics in Hong Kong. “I don’t think there’s any fundamental change to the central bank’s policy stance,” but more long-term liquidity injection can be expected as it has to maintain credit growth, he said.