Overnight the PBOC injected another CNY95 billion into its banking system bringing the total weekly injection to a record CNY1.13 trillion.
However, it was not enough and overnight China allowed its five biggest banks to cut their reserve requirement ratio by 1% taking it down to 16% thus temporarily lowering the amount of money that they must hold as reserves to relieve pressure in its financial system as demand for cash surges ahead of the Lunar New Year holiday, Reuters reported. The banks affected by the move iclude ICBC, CCB, Bank of China, Bocom, and Agricultural Bank of China. The last time the central bank cut RRR was Feb. 29, 2016. The move is expected to release approximately 630 billion yuan in liquidity.
The dramatic moves come in a bid to avert a cash crunch heading into the country’s biggest holiday of the year.
Earlier in the week short-term funding costs had spiked to their highest levels in nearly 10 years on fears that liquidity was sharply tightening, sparking a jump in the yuan currency. But China watchers polled by Reuters had not expected a cut in RRR until the third quarter of 2017, as such a move would put more pressure on the ailing yuan. Following the massive central bank liquidity injections, key funding and money market rates showed signs of easing on Friday but remained well above normal levels.
While in the past the PBOC has engaged in similar moves ahead of the new year, the latest move suggested there were additional factors involved in draining liquidity: “Today’s move seems to suggest that liquidity conditions are tighter than authorities’ expectations, as capital outflows remain strong,” said Zhou Hau, senior emerging markets economist at Commerzbank in Singapore.
“But in the meantime, an outright easing will add pressure on the yuan exchange rate as well. That could be the reason behind today’s strange move.”
The central bank will restore the RRR for the five banks to the normal level at an appropriate time after the holiday, according to Reuters’ sources. “This is a temporary adjustment, and is mainly in response to the cash withdrawal, tax payment and reserve payment. (The RRR) will go back to the normal rate after the Lunar New Year holiday,” one source said.
The PBOC said later on Friday that it will provide temporary liquidity support for several major commercial banks for 28 days to ensure adequate liquidity ahead of the Lunar New Year, according to a notice posted on its official microblog. The funding cost for the liquidity support will be about the same as the open market operations rate over the same period, the PBOC said, without specifying any requirement for collateral.
As noted previously, Chinese liquidity always tightens in China ahead of the Lunar New Year holiday, which this year starts on Jan. 27 and ends on Feb. 2, as households and companies usually withdraw huge amounts of cash from banks. The central bank typically responds by injecting ample funds into the market.
But some traders say its injections this year have barely been keeping up with heavier demand. This year, the holiday also extends over the month-end, when corporate cash demand increases and some tax payments are due, adding to the strain.
Analysts estimate that every 50 basis point cut in RRR systemwide effectively injects an estimated $100 billion worth of long-term cash into the economy, which recorded its slowest growth in 26 years last year.
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