China Pumps $24.7 Billion Into Financial System -- Update

By Shen Hong Features Dow Jones Newswires

China's central bank made its biggest one-day cash injection into the country's fragile financial markets in nearly four months Tuesday, a fresh sign that Beijing is trying to mitigate the damage to investor confidence inflicted by its recent campaign to tamp down speculation fueled by excessive borrowing.

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The People's Bank of China pumped a net 170 billion yuan ($24.7 billion) into the financial system via its daily money-market operation, the largest amount since just before the Lunar New Year holiday in January.

The huge provision of cash follows comments from Chinese officials in recent days that suggest they are concerned that recent moves to tighten market regulation have caused too much disruption.

President Xi Jinping's call for financial stability ahead of a major leadership shuffle later this year led regulators to unleash a blitz of new rules. The banking regulator under new chief Guo Shuqing has cracked down on speculative investment practices that relied on borrowed money and has also imposed sharply higher fines for irregularities.

But the new regulations, alongside tighter monetary conditions in China, have proven hard for investors to absorb. China's main stock market has dropped 5.4% in just over a month, while yields on Chinese government bonds have risen to more-than two-year highs. Bond yields rise as their prices fall.

The central bank's move appeared to have an immediate effect. The Shanghai stock market rose 0.7% on Tuesday, having earlier fallen by nearly 1%. The yield on China's benchmark 10-year government bond, meanwhile, fell back to 3.62% from 3.64%.

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"The timing of PBOC's move does point to an intention to appease investors," said Ding Shuang, an economist at Standard Chartered Bank.

Signs of Beijing's desire to soften its tone first emerged last Friday, when the central bank said in its latest monetary-policy report that regulators should carefully handle the timing and pace of introducing their policies and solve financial risks in an orderly manner. The central bank also pledged to provide necessary liquidity to ensure "reasonable" credit growth.

Also Friday, China's banking regulator said in a briefing it was trying to "avoid creating new risks in the process of resolving existing risks" and that it would give banks time to adapt, applying tougher standards only on new investment products while allowing existing ones to expire intact.

On Sunday, an editorial from the official Xinhua News Agency urged financial regulators to refrain from turning the recent campaign of risk prevention into a fresh risk itself. The same day, Chinese Premier Li Keqiang stressed at a cabinet meeting the importance of "striking a balance" between maintaining financial stability, "gradual deleveraging" and stabilizing economic growth.

"There were indeed worries that if the market volatility induced by the regulatory crackdown worsened, it could lead to systemic risk and hurt the real economy further," said Liu Dongliang, senior analyst at China Merchants Bank.

The Chinese central bank's cash injection came a day after data showed the world's second-largest economy weakened more than expected last month on flagging consumer demand and slowing investment levels. Borrowing costs for businesses, including bond yields, have risen sharply since China's central bank raised a suite of key short-term interest rates twice since early February.

As a result, new corporate bond issuance in China has plunged in recent months, making life difficult for struggling private firms that have limited access to a banking sector designed to favor inefficient but politically influential state-run enterprises. Chinese companies have raised a total of 674 billion yuan via bond issuance since this year, down from 1.8 trillion yuan during the same period a year ago.

Losses in China's stock markets have also worried securities regulators, prompting them to issue secret and usually verbal instructions, known as window guidance to market participants, to avoid large amounts of selling in recent weeks.

Such covert market intervention reached a climax on Friday, when brokerages and fund managers received fresh warnings from securities officials against placing large sell orders ahead of an important international summit in Beijing.

Yifan Xie and Grace Zhu contributed to this article.

Write to Shen Hong at hong.shen@wsj.com

(END) Dow Jones Newswires

May 16, 2017 05:34 ET (09:34 GMT)