China has launched a large-scale cash injection to prevent a liquidity shortage in the financial sector ahead of the Lunar New Year holiday. The move is a preemptive step as concerns over liquidity have grown with a simultaneous surge in household cash demand during the holiday, an acceleration in Government Bonds issuance by the government, and increased yuan demand from corporations.
According to Bloomberg on the 9th, the People's Bank of China, the country's Central Bank, recently supplied a total of 600 billion yuan (about 127 trillion won) to the market through 14-day reverse repurchase operations. This is seen as an effort to prevent a cash crunch during the Lunar New Year holiday that begins next week. The People's Bank is expected to supply up to 3.5 trillion yuan (about 739 trillion won) in additional liquidity through similar tools before the holiday begins.
By Bloomberg's own tally, the liquidity shortfall in China during this Lunar New Year period is estimated to reach 3.2 trillion yuan (about 675 trillion won). Huaxi Securities said household cash withdrawal demand for travel, consumption, and "lucky money" could reach 900 billion yuan (about 190 trillion won), and Bloomberg analyzed that the banking sector is under extreme cash pressure as this overlaps with about 405.5 billion yuan (about 86 trillion won) and 500 billion yuan (about 106 trillion won) of reverse repos coming due soon.
In particular, this year's increase in Government Bonds issuance due to the government's proactive fiscal policy is putting further pressure on liquidity. According to Guolian Minsheng Securities, local governments plan to issue about 950 billion yuan (about 200 trillion won) of bonds in the first two weeks of this month, 18% more than the total issuance in January. On top of that comes 412 billion yuan (about 87 trillion won) issued by the central government.
Yuan conversion demand from export corporations is also a factor. With the People's Bank tolerating a stronger yuan, the currency has gained 2.6% since late October last year. Analysts say this is adding pressure to market liquidity as demand rises to convert dollar revenue into yuan.
There is also growing expectation for additional monetary easing. Economists expect the People's Bank to cut the reserve requirement ratio (RRR) by an additional 0.5 percentage points within the year and lower the policy rate that serves as a benchmark. Having already reduced the one-year policy lending rate to a record low of 1.5% last month, the People's Bank is expected to calibrate the strength of monetary policy based on inflation data to be released this week.
Huachang Securities told Bloomberg, "What the market needs to worry least about this year is the People's Bank's willingness to supply liquidity," adding, "Despite short-term rate volatility due to seasonal factors, overall cash supply will remain ample."