Written by Yichao Wang, GEI Associate
The People’s Bank of China (PBOC) injected 35 billion yuan ($5.64 billion) into the market through seven-day reverse bond repurchase agreements (reverse repos), for the first time since mid April. This cash injection was intended to moderately increase short-term liquidity.
There are two main factors that contribute to the injection this time. First, the move was meant to quench banks’ seasonal thirst for funds. As it gets closer to the end of June, banks start to hoard funds to meet capital requirements. Money rates have risen every June over the past decade and 2015 would be no exception. Therefore, it is necessary for China to offset rising seasonal cash demand, and thus guide borrowing costs lower to support the economy.
Secondly, there are concerns that large batches of initial public stock offerings (IPOs) would cause liquidity tightening. According to China’s securities regulator, it had approved 28 new IPO applications, after 24 firms just finished subscriptions. These IPOs have frozen a large amount of short-term liquidity.
With regard to this cash injection, some analysts believe that this move lessens the need for more powerful monetary easing. As a dealer at a Chinese commercial bank said:
Using open market operations to inject money implies that the PBOC is unlikely to cut banks’ required reserve ratios this month.
However, it is important to note that cash injection via reverse repos is not a substitute for RRR (reserve ratio requirement) cuts. The former is short-term relief in a tight funding environment, while the latter unleashes liquidity in the long run. Moreover, there was a dramatic stock market crash recently. The ChiNext Price Index declined 27% from its record-high. Other problems including weak exports and local government debt would not be solved easily either. In order to stimulate spending for growth, further policy easing would be inevitable.
