China's $957 billion race for cash adds pressure for easing

An increase in the amount of policy loans and demand for cash to be spent during Chinese New Year are drivers. PHOTO: REUTERS

BEIJING (BLOOMBERG) - A wall of maturing debt and a surge in seasonal demand for cash will test China's financial markets this month, putting pressure on the central bank to ensure sufficient liquidity.

Demand for liquidity may total about 4.5 trillion yuan (S$957 billion) in January, 18 per cent more than the amount seen last year, according to calculations by Bloomberg based on official data and analysts' estimates.

An increase in the amount of policy loans coming due and demand for cash to be spent during Chinese New Year, which takes place earlier in 2022, are drivers. A recent reduction in the reserve-requirement ratio for banks could provide relief but some market watchers predict the central bank could ease again to avoid a liquidity crunch.

This comes after policy makers indicated a shift from deleveraging the economy to supporting growth. Cash tightness adds another headache for the authorities grappling with the fallout of China Evergrande Group, which has led a wave of defaults with at least six developers failing to pay debts on time in the last quarter.

"There are a number of factors that may pose threats in January to the stable liquidity conditions the central bank has vowed to maintain," said Cinda Securities analyst Li Yishuang, citing tax payments and maturity of policy loans. "The bond market is currently vulnerable after an increase of leverage in December, which means financial institutions will be more reliant on the People's Bank of China's (PBOC's) liquidity support."

Further policy easing will be a double-edged sword for the PBOC. While such a move could soothe concerns about higher funding costs and prevent a liquidity squeeze, it may also fuel asset bubbles that Beijing wants to avoid.

Ahead of the Chinese New Year in 2019 and 2020, the authorities lowered the reserve ratio to pump in cash. However, they avoided supplying extra funds last year, stoking fears about a tighter policy stance and sending short-term funding costs soaring.

On Tuesday (Jan 4), the PBOC reduced its injection of short-term cash to 10 billion yuan from 100 billion in the previous session.

This resulted in a net liquidity drainage of 260 billion yuan, the most since early October. Some 1.2 trillion yuan of negotiable certificates of deposit - a form of short-term bank debt - will mature in January, along with 500 billion yuan of medium-term policy loans and another 700 billion yuan of reverse repurchase agreements, according to Bloomberg's calculations.

Adding to the stress, 700 billion yuan could be drained from the financial system for gifts and travel for the Chinese New Year holiday in the first week of February, according to senior China strategist Xing Zhaopeng at Australia & New Zealand Banking Group (ANZ).

ANZ estimates that about 1 trillion yuan is required to meet tax obligations and banks may purchase a net 300 billion yuan of local and central government bonds issued in January.

On top of that, Chinese property firms will need at least US$189 billion to cover maturing onshore bonds, trust products and wages to millions of migrant workers, according to Bloomberg's calculations and analysts' estimates. This comes as the sector's debt woes have shut most of it out of the offshore primary market for refinancing. Even though most analysts foresee liquidity support, most do not expect the PBOC to go as far as cutting the reserve ratio again or even lowering the policy interest rate.

The central bank will more likely resort to using short- and medium-term tools to adjust the cash supply, according to Natwest Group economist Liu Peiqian.

More easing measures could give government bonds another leg-up. Benchmark 10-year yields slid to the lowest in over a year in late December when the PBOC injected a net 650 billion yuan into the financial system via reverse repurchase agreements in the last two weeks of the month.

The PBOC could lower the policy rate in the first quarter to help reduce financing costs for companies, which may push 10-year yields to as low as 2.6 per cent, according to rates strategist Yang Yewei at Guosheng Securities.

"The demand for liquidity will start to pick up from mid-January," said Mr Ming Ming, head of fixed-income research at Citic Securities. "But the PBOC will use a prudent policy to ensure the supply of cash is stable.

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