China's Central Bank Makes Largest Single-Day Cash Injection in Five Months

By Shen Hong Features Dow Jones Newswires

China's central bank injected the largest amount of cash into the financial system on a single day since mid-January, after choosing not to follow the Federal Reserve with an interest-rate increase this week amid signs of growing financial stress in the world's second-largest economy.

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The move by the People's Bank of China suggests Beijing is taking a more accommodative and conciliatory approach to its continuing campaign to prevent financial risk and piercing asset bubbles via higher borrowing costs and tighter supply of money. A softer policy stance is especially necessary in a month when demand for cash sees a seasonal surge in China due to corporate tax payments and regulatory requirements on banks' capital, analysts say.

Beijing's decision to stand pat on its monetary policy after the Fed's latest rate increase-- after pushing up rates within hours of the Fed's March increase--also shows a higher degree of ease among policy makers about pressures on China's currency and capital flows.

In its routine money-market operation, the PBOC injected a net 250 billion yuan ($36.73 billion) Friday, the biggest single-day release of cash since Jan. 18, when it pumped in 410 billion yuan to meet a similar sharp rise in cash demand ahead of the Lunar New Year holiday.

"Apart from the seasonal factors, the central bank's move today also shows it is adopting a milder approach to its effort to reduce financial leverage because the latter has already started to have a negative impact on the real economy," said Tang Yue, analyst at Industrial Securities.

Beijing's campaign to tame highly leveraged investing began last summer and intensified in February and March when it twice raised a suite of key money-market interest rates. The move to clean up China's messy and risk-prone financial system has led to a sharp rise in borrowing costs in recent months: Yields on government bonds rose to a 29-month high last month and remain elevated, while a record number of companies have canceled or delayed new bond issuance.

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Mr. Tang also pointed to weaker credit data released Wednesday as fresh signs of difficulty: China's broadest measure of money supply, M2, was up 9.6% at the end of May from a year earlier, lower than the 10.5% increase at the end of April and below economists' median 10.4% growth forecast. It is the first time the M2 growth figure has fallen below 10% since the central bank first published the data in 1986, according to Wind Information.

The return to liquidity tools such as short-term loans to commercial banks in money markets to adjust funding conditions, instead of following the Fed's footsteps, also betrays the central bank's concern about an already-tightening supply of cash triggering a liquidity crisis, said Liu Dongliang, senior analyst at China Merchants Bank.

June is typically a month when nervousness grips China's increasingly edgy interbank market as banks and financial institutions scramble for funds to meet needs ranging from corporate tax payment to mandatory deposits parked at the central bank. Loan defaults among a couple of medium-size banks led to an unprecedented cash crunch four years ago that nearly brought the country's financial system to its knees.

In addition, an improvement in China's foreign reserves, signs of easing pressures on capital outflows and a stable currency gave Beijing option to refrain from raising interest rates this week, Mr. Liu said.

Data released earlier this month showed that China's foreign-exchange reserves in May rose by the largest amount in more than three years, increasing by $24.03 billion from the previous month to $3.054 trillion--the fourth straight month of gains.

In a front-page commentary published on Friday, the state-run Securities Times attributed the PBOC's inaction to the better foreign-reserves data and reduced expectations of yuan depreciation.

"All these have reduced the necessity for the PBOC to follow the Fed with a passive rate hike," the newspaper wrote in the commentary.

Despite the PBOC's decision to stand pat this time, the gap between Chinese and U.S. market interest rates have widened sharply in recent months.

The yield on the 10-year Chinese government bond is at 3.56%, a 1.4 percentage-point premium above that on the corresponding Treasury, up from just 0.62 percentage point in early August, before Beijing started the campaign to cut financial risk.

"The interest rate gap between China and the U.S. is wide enough, so there's no need for China to raise rates now," said Mr. Tang.

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

(END) Dow Jones Newswires

June 16, 2017 01:49 ET (05:49 GMT)