The People’s Bank of China (PBoC) has flooded China’s financial system with record amounts of cash this past week to pre-empt the annual liquidity crunch ahead of the Lunar New Year in early February. The central bank is cautiously refraining from cutting interest rates or the reserve requirement ratio (RRR), as it fears that the traditional monetary easing tools may send the already weakening renminbi down even further.
The People’s Bank of China (PBoC) pumped a net RMB 690 billion into China’s banking system this past week through open market operations, marking the largest single-week injection on record. The move brought the net cash injections this month to RMB 1.9 trillion, including RMB 1.235 trillion via reverse purchase agreements (repos) and RMB 612.5 billion through medium-term loans.
While the usual auction windows are on Tuesday and Thursday, the monetary authority pledges to increase the frequency of its cash injections to a daily basis between January 29th and February 19th, except during the weeklong Lunar New Year holiday that begins on February 7th.
The central bank’s aggressive cash injections came to pre-empt the annual, holiday-induced liquidity squeeze around the Lunar New Year. Cash demand typically spikes ahead of the most celebrated holiday in China, when people traditionally travel, dine out more and exchange cash and gifts. But in addition to seasonal factors, the central bank faces unusual challenges this year as it battles the gigantic capital outflows that risk draining much-needed liquidity out of the economy. China’s estimated 2015 total capital outflows reached USD 1 trillion, according to Bloomberg.
This post was published at FinancialSense on 02/05/2016.
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