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Liquidity injections to reduce cash pressure

Li Xiang
Updated: Feb 13,2015 8:21 AM     China Daily

A bank employee prepares bank notes at an Industrial and Commercial Bank of China Ltd cash center in Wuxi, Jiangsu province. Surging demand for cash by customers for year-end bonus payments has put banks under pressure.[Photo/China Daily]

Holiday demand, IPOs have financial institutions pressed to meet requirements

Monetary authorities seem to have joined the holiday spending spree by offering “red envelopes” worth billions of dollars to financial institutions to avert a seasonal liquidity crunch ahead of the Lunar New Year, which starts next week.

Increased demand for cash for year-end bonuses to employees and preparing red envelopes for friends and relatives, as well as last-minute holiday shopping, has banks under pressure to meet the demand.

The People’s Bank of China on Feb 12 injected 160 billion yuan ($25.6 billion) through 14- and 21-day reverse repurchase arrangements at interest rates of 4.1 and 4.4 percent, respectively.

Reverse repos involve the central bank purchasing securities from banks, thereby injecting cash into the system.

With these transactions, the PBOC has injected a net 205 billion yuan into the financial system this week, the largest one-week liquidity injection by the central bank since January 2014.

The seasonal cash pressure on banks is being exacerbated by a wave of initial public offerings that will tie up huge funds, according to a Bloomberg survey

Analysts said that the PBOC’s moves have not caused money market rates to drop substantially, indicating the central bank’s objective is to ensure sufficient money supply rather than providing a flood of cheap money.

“The main purpose of the recent liquidity accommodation is to prevent financial risks caused by cash flow problems among financial institutions,” said Zhou Xi, an analyst at Bohai Securities Co Ltd.

To ensure sufficient funds in the money market during the holiday season, the central bank also expanded the short-term lending arrangement, known as the Standing Lending Facility, to smaller city and rural financial institutions on a national basis.

The SLF, created by the central bank in 2013 to provide liquidity to national commercial and policy banks, was previously limited to 10 provinces and cities.

Compounded by holiday demand and IPOs, interest rates in the money market will unavoidably edge higher in the short term. But in the longer term, the PBOC’s monetary policy will continue to be guided by the principle of stabilizing money supply, Zhou said.

Chang Jian, chief China economist at Barclays Plc, said that slower GDP growth and the decline in inflation should prompt the PBOC to ease monetary policy further.

Chang characterized the recent easing as a “reluctant” move by policymakers who must weigh the need for further accommodation against the risk of fueling asset bubbles and delaying needed structural adjustments.

Chang said that additional easing could not be ruled out if inflation continued to decline or GDP growth kept weakening.

Testing time for central bank

Rich or poor, young or old, China’s 1.3 billion residents are about to embark on the biggest movement of people in the world to celebrate the Lunar New Year with family and friends.

Factories will be shut, schools deserted and government offices closed. Cash-stuffed red envelopes will be handed out by bosses to employees, parents to kids and elders to the young.

About 2.8 billion trips will be made, including 295 million on trains, according to government estimates. Spending at retail outlets and restaurants in the holiday week last year totaled 610.7 billion yuan ($97.79 billion).

Between dumpling feasts and firework shows, spare a thought for the headache all of this poses for the People’s Bank of China, which has to ensure there is enough liquidity to fund the binge of travel, shopping, drinking and gift-giving.

The PBOC has been shoveling cash into the system via reverse repurchase agreements (where the central bank buys securities from banks), expanding a standing lending facility and doing whatever else it can to ensure money markets do not seize up.

Compounding the headache this year, some 24 initial public offerings will lock up about 2 trillion yuan this week, according to estimates.

The holidays start on Feb 18 and run through Feb 24.