China increases short-term cash injections to ease liquidity concerns

(Bloomberg) – China’s central bank increased its short-term liquidity injection for the first time since March as it prepared to allay market concerns over liquidity conditions before the end of the quarter.

The 30 billion yuan ($ 4.6 billion) injection marked the end of the People’s Bank of China practice of adding 10 billion yuan each trading day for the past three months. This move bodes well for the liquidity outlook in the second half of the year, as some 4.15 trillion yuan in medium-term political loans will mature by December.

“The market now thinks it knows the charts of the PBOC – it will keep the liquidity reasonable for the rest of the year,” said Wan Kelin, analyst at Topsperity Securities. “While there may be fluctuations throughout this course, the theme is the same. “

China’s overnight borrowing costs posted the largest overnight drop in nearly three months, as the PBOC injection eased money market nervousness fueled by end-of-quarter regulatory checks on banks and local government bond issuance. The move also suggested that policymakers combine action and rhetoric after a center-backed editorial recently criticized what it called “baseless” predictions of a liquidity crunch.

The overnight redemption rate, an indicator of interbank funding costs, fell 35 basis points to 1.83%, the largest day-on-day decline since April 2. The rate traded within a range of 50 basis points this month. The most actively traded one-year debt contract fell four basis points to 2.39%. China’s benchmark CSI 300 equities rose 0.2%.

Fears of a government bond rout have intensified lately, with regional authorities expected to sell some 660 billion yuan of debt this month, which could drain interbank liquidity, according to Citic Securities Co. Banks China could also become less willing to lend in late June as they prepare for regular liquidity checks by the authorities, reducing levels of liquidity in the system that could be used to buy bonds.

Investors will be watching to see if the central bank injects more liquidity into the system over the next few months with a series of loans scheduled to mature by December. The maturity of medium-term policy loans in the second half will be more than three times that seen in the first half, according to data compiled by Bloomberg.

Short-term funding costs were not excessively high before the operation, and banks were willing to lend liquidity overnight after the PBOC injected liquidity, according to a trader. The seven-day funding remains expensive as it covers the quarter-end period, said the trader, who asked not to be named because he is not authorized to comment publicly on the rate market.

Becky Liu, head of China macro strategy at Standard Chartered Plc, said the injection could be aimed at keeping markets stable ahead of national celebrations for the 100th anniversary of the Communist Party of China on July 1.

“This is more of a precautionary measure to ensure that there will be no liquidity stress over the next half year, even when interbank liquidity conditions are not strained,” Liu said. . “The PBOC will proactively manage interbank liquidity conditions to adhere to the policy of being ‘reasonably accommodating’.”

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