(Bloomberg) — China’s central bank pumped a near-historic amount of short-term funds into its financial system on Wednesday, dialing up liquidity support amid a cash squeeze with the new year holiday looming.
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The People’s Bank of China injected a net 958.4 billion yuan ($131 billion) of cash via seven-day reverse repurchase agreements in daily open market operations, the second highest on record in data compiled by Bloomberg going back to 2004.
The operation is aimed at offsetting the impact of the expiration of medium-term lending, peak tax season and cash demand before Lunar New Year holidays, and to keep banking system liquidity ample, the central bank said in a statement.
The sizable liquidity support will come as a relief for Chinese lenders after a cash crunch earlier this week pushed seven-day interbank funding rates to the highest in more than a year. The PBOC’s increasing determination to defend the under-pressure yuan has led to fears it may be restrained in providing sufficient liquidity support for the economy.
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“The PBOC will likely continue to ramp up open market operations in 2025 as they have aimed to increase use of these tools as part of their monetary policy toolkit,” said Lynn Song, Greater China chief economist at ING Bank. “This is also a way to affect the liquidity environment outside of the big headline rate and reserve requirement ratio moves, which have likely been held in reserve to use at a more suitable time.”
The reverse repurchase agreements in part replaced a monthly expiry of medium-term financing of about 955 billion yuan. The PBOC in recent months has been shifting away from the so-called MLF and its rate as the main policy tool, shifting instead to the seven-day reverse repo rate to guide market borrowing costs.
The MLF operation date has been delayed until later each month and the PBOC typically uses reverse repo to moderate money market volatility in between MLF maturities and new operations.
China will use monetary tools such as interest rates and the reserve requirement ratio to keep liquidity ample, PBOC Deputy Governor Xuan Changneng said at a press briefing on Tuesday.
The seven-day repo rate, an interbank borrowing cost benchmark, fell 70 basis points to 1.6% as market trading opens following the PBOC operation. The rate closed Tuesday at 2.3%, the highest since October 2023.
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–With assistance from Shulun Huang.
(Updates with comment and market price)
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