Those following the PBOC's daily net repo flows have been speculating in recent days if maybe Beijing was, for once, finally serious about draining the excess liquidity sloshing around China's financial system sparking an epic credit impulse. And for good reason: in the month of December, the PBOC made a net injection on just two days while draining hundreds of billions in yuan.
However as with every previous false hope that China was finally getting ready to set its house (of cards) in order, it was not meant to be because overnight China’s central bank made its biggest ever injection of medium-term liquidity (via the Medium-term lending facility) on Tuesday to shore up liquidity, after the recent surge in corporate bond defaults shattered investor confidence and slammed the brakes in new bond issuances.
On Tuesday morning, the People’s Bank of China said it had issued 950 billion yuan ($145 billion) worth of one-year medium-term lending facility (MLF) loans to financial institutions to keep the “banking system liquidity reasonably ample”.
The PBOC also said it injected another 10 billion yuan via seven-day reverse repurchase agreements on Tuesday, keeping the rate unchanged. The fresh fund injection far exceeds two batches of MLF loans worth a total of 600 billion yuan set to expire in December, and represents a sizable net injection of liquidity for the month.
Additionally, the PBOC kept the interest rate unchanged for an eighth straight month at 2.95%, which likely means no change to the PBOC's benchmark loan prime rate (LPR) at its next monthly fixing next Monday. The MLF, among PBOC’s main tools in managing longer-term liquidity in the banking system, serves as a guide for the LPR, which is set monthly using assessments from 18 banks.
The PBOC has made two cuts to the borrowing cost of MLF loans this year totalling 30 basis points; the central bank has shown reluctance to broad rate cuts and is why its preferred method of easing policy is by injecting lilquidity.
The PBOC move is aimed at keeping the bond market stable while keeping long-end market liquidity reasonably abundant, said Yan Se, chief economist at Founder Securities in Beijing. “Further widening of the yield spread between China and the United States will affect foreign exchange and exports,” Yan said. “Therefore, we believe that (the authorities) should be cautious about raising interest rates.”
"We’ve seen so many cancelled issuances, particularly from local government entities and such that clearly need the funds, so I think until that gets back to normal we’ll probably continue to see the PBOC on a slightly more accommodative stance," Thomas Gatley, China corporate analyst at Gavekal in Beijing, told Reuters.
The injection comes on the heels of high-profile defaults by top-rated state-owned enterprises (see "Sudden Default By AAA-Rated Chinese State-Owned Coal Miner Sends Shockwaves Across Markets") last month that sparked heavy selling in the corporate bond market. The defaults prompted investigations into issuers and underwriters and widespread cancellation of bond issuance, weighing on credit growth.
Dollar/yuan swap points fell after the huge cash injection, with the one-year tenor easing to the lowest in more than four months. Key interbank borrowing costs also eased.
The latest injection also eased some worries about liquidity at the year end, when demand for cash typically rises, traders said. Of course, as even Reuters notes, "the move comes even as senior central bank officials repeatedly raise the topic of exiting monetary easing policies", confirming once again that for all their talk, central banks will never dare to actually pull the oceans of liquidity in which risk assets are now swimming.