PBOC Injects Most Short-Term Funds This Month Amid Cash Crunch

The People's Bank of China (PBOC) has injected a near-historic amount of short-term funds into the financial system, dialing up liquidity support amid a cash squeeze with the new year holiday looming. On Wednesday, the PBOC injected a net 958.4 billion yuan ($131 billion or RM588.8 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, the 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 sizeable 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, especially as it has decided to suspend government bond purchases in a bid to cool a bond market frenzy. However, Lynn Song, the Greater China chief economist of ING Bank, believes that 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.

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.

The central bank has also been using liquidity measures to expand its support for the yuan, which has come under pressure from a strengthening dollar. It sold a record 60 billion yuan of six-month bills in Hong Kong on Wednesday, a move which will drain liquidity offshore to support demand for the currency.

Onshore, China will use monetary tools such as interest rates and the RRR to keep liquidity ample, the PBOC's deputy governor Xuan Changneng said at a press briefing on Tuesday. The seven-day repo rate, an interbank borrowing cost benchmark, fell as much as 70 basis points following the PBOC operation, before paring the decline to trade around 2.2%. The rate closed on Tuesday at 2.3%, the highest since October 2023. Liquidity conditions remained tight for non-financial institutions, with signs of demand exceeding supply, according to traders.

The PBOC's easing stance has not changed, and it could use seven-day and 14-day reverse repo, as well as outright reverse repo to provide liquidity to meet high seasonal demand. Beyond the very short term, the PBOC is expected to continue cutting its RRR, and will resume its net government bond purchases.