China set to add liquidity support to stave off cash squeeze: Analysts

China will probably add more cash into the financial system this week as the largest amount of policy loan in a year comes due. Some market watchers also expect a near-term reduction in banks’ reserve requirement ratio. 

The People’s Bank of China (PBOC) will offer 950 billion yuan (S$180 billion) through the medium-term lending facility on Wednesday, according to the median estimate of 10 analysts in a Bloomberg survey.

That would exceed the 850 billion yuan maturing in November.

Most economists expect the one-year policy interest rate to remain at 2.5 per cent. 

Liquidity conditions have tightened as a deluge of bond issuance to fund fiscal stimulus, along with year-end cash demand from corporates, drove up rates in the money market.

A spike in short-term borrowing costs in late October rattled markets, putting pressure on the PBOC to keep funding costs stable and facilitate economic recovery.  

Should Wednesday’s liquidity infusion prove modest, expectations that Beijing will reduce the amount that banks have to set aside as reserves may gather traction.

Even if the PBOC offers around one trillion yuan as some economists project, which would be the most since 2021, the net injection will still trail that of the previous month due to maturing loans. 

Mizuho Securities and ANZ Bank China are among those expecting a reduction in the required ratio in the coming weeks.  

“The odds for an imminent reserve requirement ratio cut are very high, given structurally tight funding on the back of recent stronger primary issuance and to facilitate smooth issuance of upcoming special government bonds,” said Ms Becky Liu, head of China macro strategy at Standard Chartered in Hong Kong.

“The PBOC will watch out for liquidity stress more carefully, given the episode at end-October,” she added.

Short-term borrowing costs had surged abruptly on Oct 31, with the overnight rate climbing to as high as 50 per cent in isolated transactions.

A reduction of 25 basis points in the required ratio would release around 500 billion yuan into the financial system, according to Bloomberg Intelligence.

As the authorities ramp up fiscal spending, banks are facing the duelling tasks of absorbing government bond supply while boosting lending to invigorate domestic demand.

That has made liquidity management increasingly complicated in recent months, especially as the country faces huge capital outflows across stocks, bonds and foreign direct investment.

The bond supply bonanza is expected to continue in the months ahead, with the Ministry of Finance planning an additional one trillion yuan in sovereign bonds in a rare mid-year revision to the fiscal budget.

That comes after central and local governments took their borrowing spree in October to a new monthly high for the year.

“PBOC will likely roll over as keeping liquidity balanced amid all the extra issuances is crucial at this juncture,” said Ms Leong Lin Jing, a senior emerging market sovereign analyst at Columbia Threadneedle Investments in Singapore.

They likely do not want to risk “liquidity tightening up and seizing the market when they are trying to support growth”, she said. BLOOMBERG