Record cash infusion can help rates in China to remain low, motivating lenders to support a higher issuance of government bonds and make more loans to clients.
The People’s Bank of China distributed a record sum of cash – a net 733 billion yuan – to lenders via a short-term liquidity tool called reverse repurchase contracts on Friday, Oct. 20. The move is expected to bolster national economic growth.
With a record cash infusion, China aims to make sure that funding costs in its financial markets remain low enough to maintain the recovery growth of the nation’s economy first witnessed this September. Lenders are expected to be willing to provide more loans and support government bonds under such conditions.
An additional purpose of the move is to support the cash demands of the upcoming tax season when central and local governments are expected to sell more bonds to fund stimulus. A new round of stimulus may help the Chinese economy meet the official annual growth target of around 5%.
Last month the gross domestic product of China grew by 4.9% compared to the same period in 2022, suggesting that Beijing can achieve economic development targets this year. The growth was spurred by easing measures, introduced by Chinese authorities earlier. Namely, the country cut its benchmark rates and reserve requirements for banks twice and made the largest medium-term liquidity injection in nearly three years.
Moreover, in September, the Ministry of Finance sold 1.2 trillion yuan worth of central government bonds. That amount was 60% higher than the average for the same period in the past three years. The bold move helped drain cash from the system.
Right after the fresh cash injection, the seven-day repo rate, a measure of interbank funding costs, surged 25 basis points to a six-month high of 2.32%. At the same time, Chinese lenders kept the one-year loan prime rate unchanged at 3.45% and the five-year rate — a reference for mortgages — remained at 4.2%.