SHANGHAI • China's central bank yesterday said it was injecting 440 billion yuan (S$96 billion) into the money market, seeking to ease tight liquidity ahead of the Chinese New Year holiday when demand for funds surges.
But the move by the People's Bank of China (PBOC) failed to stop the share markets from falling. Stocks tumbled to their lowest levels in 13 months amid concern that capital outflows will accelerate as the economy slows and support for the yuan eats into the nation's foreign reserves.
The Shanghai Composite Index plunged 6.4 per cent to 2,749.79 at the close. All industry groups slumped, ranging from commodity companies to new-economy shares such as technology.
"It is standard practice for the PBOC to inject large amounts of liquidity into the banking system ahead of Chinese New Year," Capital Economics said in a research report last week.
"If it didn't, the increased demand for cash during the holiday would cause liquidity conditions to tighten significantly and interbank rates would surge."
Chinese companies typically pay salaries and bonuses before the holiday, which falls in early February this year. People also traditionally exchange cash and gifts during the period.
The PBOC last week flooded the financial system with more than 1.5 trillion yuan.
Some analysts have likened the latest fund injections to a loosening of monetary policy or a replacement of funds lost to capital outflows.
ANZ Banking Group said the injections have prompted the central bank to hold off lowering the reserve requirement ratio for banks - the amount of funds they must put aside - though a cut would eventually be needed to help boost the slowing economy.
China's economy grew at its slowest rate in a quarter of a century in 2015 at 6.9 per cent, raising expectations for further cuts in interest rates or reserve requirements.
AGENCE FRANCE-PRESSE, BLOOMBERG