(Bloomberg) – China has stepped up its injection of short-term liquidity into the financial system, a sign that authorities seek to ease market nerves, weakened by concerns over quarter-end financing needs and the crisis of the debt of the China Evergrande group.
The People’s Bank of China on Friday injected 90 billion yuan ($ 14 billion) in funds on a net basis through seven-day and 14-day repurchase agreements, the highest number since February. Today was the first time this month that the authorities added more than 10 billion yuan of short-term liquidity to the banking system in a single day.
The transaction comes as the crisis facing Evergrande is fueling concerns about the health of the country’s real estate and credit markets. Adding to the stress is a seasonal increase in demand for liquidity, as banks become less willing to lend towards the end of the quarter as they prepare for regulatory checks. Liquidity also tends to decrease at this time of year as a week’s vacation approaches in early October.
“Avoiding a systemic liquidity crunch is the top priority for the PBOC and it has the means to do so,” wrote economists at Societe Generale SA led by Wei Yao in a research note. “A Lehman-style financial market meltdown is not our main concern, but a prolonged and severe economic downturn seems more likely.”
Concerns over Evergrande come at a time when the Chinese economy is already slowing. Aggressive movement controls put in place to curb Covid-19 outbreaks have hurt retail spending and travel, while measures to cool house prices have also taken their toll. On Wednesday, the country reported a slowdown in retail sales in August, along with weaker growth in industrial production and capital investment.
The PBOC seeks to strike a balance between stimulating the economy and ensuring that its liquidity injections do not lead to asset bubbles. Since July, the PBOC has refrained from injecting additional medium-term liquidity into the financial system as policy loans mature.
On Friday, the central bank injected 50 billion yuan through its seven-day reverse repurchase agreements, and an additional 50 billion yuan through 14-day contracts, which have not been used since February. Some 10 billion yuan matured on Friday.
“It is fair to say that the Evergrande situation and its repercussions on the wider real estate market will have a far greater direct impact on Chinese growth than any other regulatory crackdown,” said Alvin Tan, head of the foreign exchange strategy in Asia at Royal Bank. from Canada to Hong Kong. “I would not be surprised if the PBOC acts to contain the fallout in the money markets.”
The uncertainty over Evergrande prompts Chinese observers to rule out potential worst-case scenarios as they contemplate the pain the Communist Party is willing to tolerate. The pressure to intervene is increasing as signs of financial contagion increase.
Yet the PBOC’s operations have yet to lower money market rates. The seven-day repo rate, an indicator of the cost of interbank borrowing, jumped 12 basis points on Friday to 2.39%, its highest level since July.
“The PBOC is once again proving to the market that it will be favorable, but only if there is a need,” said Frances Cheung, rate strategist at Oversea-Chinese Banking Corp in Singapore.
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