China Capitulates: Injects $25 Billion Into Liquidity-Starved Banks To "Appease Investors"

Tyler Durden's picture

Is China's push to deleverage its financial system over?

That is the question following last night's dramatic reversal in recent PBOC liquidity moves, when after weeks of mostly draining liquidity, the central bank injected a whopping 170 billion yuan (net of maturities), or $24.7 billion, the biggest one-day cash injection into the country’s financial markets (and contracting shadow banking system as first reported here last week, when we showed the first drop in China Entrusted Loans in a decade) in four months. The surprising move was "a fresh sign that Beijing is trying to mitigate the damage to investor confidence inflicted by its recent campaign to tamp down speculation fueled by excessive borrowing" according to the WSJ.

Today's injection was the the largest since just before the Lunar New Year holiday in January, when Chinese banks traditionally stock up on liquidity.

Why the sudden shift?

On one hand it is possible that the PBOC is simple concerned about the sharp decline, and in fact contraction, in China's shadow banking system, where as we showed last week Entrusted Loans posted their first decline since 2007 even as China's M2 continued to decline.


The huge cash injection followed comments from Chinese officials in recent days which hinted they are getting concerned that recent moves to tighten market regulation have caused too much disruption. As a reminder, in recent weeks money market rates and yields on corporate bonds had all shot up to multi-year highs.

The real reason may be simpler: with a major leadership shuffle due later this year, the central bank is not taking even the smallest chances of turmoil in the banking sector. and as such admitted that - once again like in 2013 - its posturing to delever the world's most leveraged financial system was just that. The WSJ has more:

President Xi Jinping’s call for financial stability ahead of a major leadership shuffle later this year led regulators to unleash a blitz of new rules. The banking regulator under new chief Guo Shuqing has cracked down on speculative investment practices that relied on borrowed money and has also imposed sharply higher fines for irregularities.


But the new regulations, alongside tighter monetary conditions in China, have proven hard for investors to absorb. China’s main stock market has dropped 5.4% in just over a month, while yields on Chinese government bonds have risen to more-than two-year highs. Bond yields rise as their prices fall.

Predictably, China throwing in the towel on deleveraging immediately raised animal spirits: the Shanghai stock market rose 0.7% on Tuesday, having earlier fallen by nearly 1%. The yield on China’s benchmark 10-year government bond, meanwhile, fell back to 3.62% from 3.64%.

Ultimately, what the PBOC did is just what every other developed central bank when faced with declining markets: it capitulated.

The timing of PBOC’s move does point to an intention to appease investors,” said Ding Shuang, an economist at Standard Chartered Bank.

As Goldman noted over the weekend, the first sign of Beijing’s desire to soften its tone emerged last Friday, when the PBOC said in its latest monetary-policy report that regulators should carefully handle the timing and pace of introducing their policies and solve financial risks in an orderly manner. The central bank also pledged to provide necessary liquidity to ensure “reasonable” credit growth. It waited just 2 days to do just that.

Also Friday, China’s banking regulator said in a briefing it was trying to “avoid creating new risks in the process of resolving existing risks” and that it would give banks time to adapt, applying tougher standards only on new investment products while allowing existing ones to expire intact.

Then on Sunday, an editorial from the official Xinhua News Agency urged financial regulators to refrain from turning the recent campaign of risk prevention into a fresh risk itself. The same day, Chinese Premier Li Keqiang stressed at a cabinet meeting the importance of “striking a balance” between maintaining financial stability, “gradual deleveraging” and stabilizing economic growth.

“There were indeed worries that if the market volatility induced by the regulatory crackdown worsened, it could lead to systemic risk and hurt the real economy further,” said Liu Dongliang, senior analyst at China Merchants Bank. And with a critical for Xi Jinping Congress later this year, the risk of overshooting the tightening was just too high.

The Chinese central bank’s cash injection came a day after data showed the world’s second-largest economy weakened more than expected last month on flagging consumer demand and slowing investment levels. Borrowing costs for businesses, including bond yields, have risen sharply since China’s central bank raised a suite of key short-term interest rates twice since early February.


As a result, new corporate bond issuance in China has plunged in recent months, making life difficult for struggling private firms that have limited access to a banking sector designed to favor inefficient but politically influential state-run enterprises. Chinese companies have raised a total of 674 billion yuan via bond issuance since this year, down from 1.8 trillion yuan during the same period a year ago.

But the single biggest catalyst may have been an all too familiar one: China's stocks had failed to keep up with the rest of the world, prompting analysts and traders to ask just how bad is the true situation behind the scenes.

Losses in China’s stock markets have also worried securities regulators, prompting them to issue secret and usually verbal instructions, known as window guidance to market participants, to avoid large amounts of selling in recent weeks.

The punchline: "such covert market intervention reached a climax on Friday, when brokerages and fund managers received fresh warnings from securities officials against placing large sell orders ahead of an important international summit in Beijing."

And just like that, China confirmed that when facing a declining market, and rising worries that China's fading credit impulse will drain the global punchbowl, it will do everything in its power to restore the status quo.

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Manthong's picture

“To liquidity! ..the cause of and solution to all of life’s problems”.


Mr Pink's picture

A story that isn't about Trump, Wikileaks, Seth Rich or the WaPo.....I guarantee that Soros' Shareblue trolls leave this thread alone.


thunderchief's picture

This hole is too deep to fill!

Until you revalue gold.

Arnold's picture

Don't give them any ideas.
It is already revalued and fixed daily.

StackShinyStuff's picture

Give $25B to the banks or give rice to the peasants.  What to do, what to do...

Arnold's picture

Only $25 billion to solve the problem?
It is rice to the peasants.
That gives them about ten minutes of cash flow.

Bill of Rights's picture

" Cookie monster love paper....numm numm numm "

DaBears's picture

" 170 billion yuan (net of maturities), or $24.7 billion

No no, it's still just toilet paper pretending to be $24.7 billion

BigFatUglyBubble's picture

You heard of drunken boxing?  This is drunken banking.  It appears that they are off balance and not in control, but in fact it is the opposite.

BigFatUglyBubble's picture

Trump and Tankman will send the PBOC a strongly worded letter about this!

Nesbiteme's picture

China's push to deleverage its financial system over?”

China' financial system is nothing but LEVERAGE, it is all LEVERAGE except for the part of the Chinese financial system attached to the portion of China's GDP involved in the making of fireworks and those paper umbrellas that were so popular at Trader Vic's back in the 1950s, 60s, 70s, 80s and early 90s. That part of the Chinese financial system is what the rest of the Chinese financial system is leveraged upon.



ZoroAustrian's picture

And what are we here in the West leveraged on?


Nesbiteme's picture


That's a very good question. Thank you for asking it. We, here in the West (and really let's be honest it's really the United States we are talking about here) are leveraged on a sounder more stable base which was primarily constructed from money we borrowed from ourselves then gave to the Chinese (in exchage for fireworks and paper umbrellas) who then lent it back to us. 

oDumbo's picture

Think of China discovering debt like a kid discovering grandpa's playboy for the first time.  Party!  Until it inevitably creates a mess that can't be cleaned.

The Ram's picture

No surprise here.  It's a crack/cocaine fueled debt system so they have no choice but to inject liquidity to keep the appearance of at least  the status quo.  Tick Toc

youngman's picture

I just wonder where we will be in ten years....trillions more...or hundreds of trillions much paper money needed to plug the leaks and fill the shortfalls....and only one small earth....

ali-ali-al-qomfri's picture

Trillion is the new $100 dallar bill.

Sky flyer's picture

Is there no fucking thing that can bring these markets down? As the world descends into chaos the algos are all under complete control. Death to the money changers.

KimAsa's picture

Too bad Bernie Madoff didn't have his own printing press back then.

Cordeezy's picture

Well this wont be good for that Belt and Road Initative.


Squids_In's picture

Presumably these CB repos require good collateral. That means the stinking pile of bad loans and dud paper is still out there. Solves nothing. Buys a couple of days or weeks. They must have discovered a serious problem. Watch for the liferafts. 

youngman's picture

what they do is if you have a bad loan...they give you a new loan to pay off the bad loan....of course for a little payoff pocket money and fees to boot..but it looks like you are doing good business to the regulators...

GoldHermit's picture

Tick, tick, tick 

ali-ali-al-qomfri's picture

are we witness to the creation of the new QueE Dynasty.