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China’s central bank has pumped a record amount of short-term funds into the financial system this week in an effort to pre-empt the cash crunch that usually accompanies the lunar new year holiday.
Aimed at smoothing seasonal turbulence, the total cash injection of Rmb2.2tn ($300bn) through the 14-day reserve repo — a short-term liquidity tool — comes as millions of residents prepare to travel home, settle tax bills and hand out cash-filled red envelopes.
While these injections are commonly seen during the holiday period, the size of this week’s operation has damped expectations of an imminent cut to banks’ reserve requirement ratio, the level of funds that banks must hold in reserve.
The People’s Bank of China has in recent months repeatedly said it would cut the ratio “at an appropriate time” as part of efforts to revive confidence in the economy. It has also changed its monetary policy stance from “prudent” to “moderately loose” as it tries to spur growth.
A cut in the reserve requirement ratio is widely seen as a substantial easing move aimed at boosting long-term credit.
“The prospect for an RRR cut before the lunar new year now appears slim, given the current liquidity situation and the broader macroeconomic conditions,” said Wang Qing, chief macroeconomic analyst at Golden Credit Rating.
“The central bank had also front-loaded a significant amount of the medium-term liquidity into the market in December, leaving the system adequately supplied but not excessive.”
Delaying a cut reflects the PBoC’s intricate balancing act, with the central bank keen to reserve use of its tools for what it anticipates to be a challenging year economically, said analysts. China’s property market has been hit by a prolonged crisis, and companies are bracing for the fallout of Donald Trump’s protectionist policies.
Given the strong signal sent by an RRR cut and the limited space for the PBoC to trim it further, the central bank would want to “reserve some bullets for the signalling effect for later”, said Xiaojia Zhi, chief China economist at Crédit Agricole. The average reserve requirement ratio at Chinese banks stands at 6.6 per cent.
The PBoC is expected to rely more on open market operations in 2025 to manage liquidity, instead of cuts to the benchmark policy rate or the RRR, said Lynn Song, chief economist for greater China at ING. “Significant headline moves on interest rates and the RRR are likely being reserved for a more suitable time.”
With deflationary pressures mounting and the property sector still in deep distress, Beijing is trying to reflate the world’s second-largest economy. Yet it also wants to avoid further renminbi weakness.
The offshore renminbi has been under strain, weakening 3 per cent against the dollar since Trump’s presidential election victory in early November, while the tightly controlled onshore currency hovered around a 16-month low at the start of the year before rebounding recently.
The potential escalation of trade tensions between China and the US has heightened fears of capital outflows, limiting the PBoC’s ability to lower rates.
“Recent pressure on the yuan rate will put constraints on the PBoC’s monetary easing measures,” according to an internal briefing memo this week from a state-owned bank seen by the Financial Times. “The central bank has also used subtle actions to temper market expectations of further easing at this stage.”
Since December, the central bank has set a strong daily reference rate for the renminbi, issued offshore bills and stopped buying government bonds. This suggests the PBoC is prioritising currency stability over other pro-growth targets, said Larry Hu, chief China economist at Macquarie.
“Last year, the PBoC adopted a strategy we called ‘hang in there until the Fed blinks,’” said Hu. “Now, with the yuan under pressure due to the strong dollar, the PBoC has to hang in there again until the dollar weakens. For now, yuan stability is the priority over other policy goals.”
Still, some analysts said they believed more substantial moves were on the horizon after the lunar new year holiday and that the PBoC had a choice of tools it could use.
“There are a few that the PBoC could consider, including outright reverse repos of various tenors, net government bond purchases, as well as RRR cut,” said Zhi of Crédit Agricole.
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