China central bank to inject US$91 billion to ease liquidity strains

BEIJING (REUTERS) - China's central bank said on Tuesday it would inject more than 600 billion yuan (S$131.27 billion) to help ease a liquidity squeeze expected before the Lunar New Year in early February.

The People's Bank of China (PBOC) will inject the funds via the three policy tools of the standing lending facility (SLF), medium-term lending facility (MLF) and pledged supplementary lending (PSL), it said in a statement on its website.

Liquidity conditions often tighten ahead of the week-long new year holiday and the central bank usually injects large amounts of cash into the banking system prior to the festivities to keep rates steady. The first day of the new year is Feb. 8.

Analysts say the PBOC's move could reduce the need for it to cut banks' reserve requirement ratios (RRR) in the near future, but the central bank remains under pressure to ease policy to support a slowing economy.

Growth in the fourth quarter slowed to the weakest since the financial crisis, increasing pressure on a government struggling to regain the confidence of investors after perceived policy missteps jolted global markets.

"The liquidity injections may lower the urgency for cutting bank reserve ratios in the near term," said Li Huiyong, an economist at Shenyin & Wanguo Securities in Shanghai. "This reflects the central bank's intention to keep liquidity ample by using flexible policy tools." The central bank provides loans with shorter maturity to banks via operations such as SLF and MLF, while cutting RRR would release long-term money.

Analysts believe there is still room for the central bank to lower bank reserve requirements as capital outflows rise.

China's central bank and commercial banks sold a net 629 billion yuan worth of foreign exchange in December, data showed on Monday, or nearly triple the figure for the previous month, as capital outflows grew.

The central bank pledged to keep liquidity in the banking system "reasonable and adequate" and keep market interest rates stable ahead of the Lunar New Year. "The international financial market turmoil is intensifying, and liquidity volatility in the banking system is increasing,"it said.

The central bank will also provide short-term cash to financial institutions through reverse bond repurchase agreements in its open market operations.

Separately, the central bank injected 410 billion yuan into the banking system on Tuesday via MLF, it said on its official microblog, adding that it had cut the three-month MLF rate to 2.75 per cent, and lowered the one-year MLF rate to 3.25 per cent.

It was unclear if the latest injection was part of the 600 billion yuan planned for the Lunar New Year.

The central bank has already cut interest rates six times since November 2014, and reduced the amount of cash that banks must hold as reserves, but such steps have had limited impact on growth due to high debt levels in the economy. More easing steps are widely expected in the coming months.