Beijing faces financial market test


On Tuesday, the PBoC reduced its injection of short-term cash to 10 billion yuan (RM6.6bil) from 100 billion yuan (RM65.9bil) in the previous session. That resulted in a net liquidity drainage of 260 billion yuan (RM171bil), the most since early October.

SHANGHAI: A wall of maturing debt and a surge in seasonal demand for cash will test China’s financial markets this month, putting pressure on the central bank to ensure sufficient liquidity.

Demand for liquidity may total about 4.5 trillion yuan (US$708bil or RM2.97 trillion) in January, 18% more than the amount seen last year, according to calculations by Bloomberg based on official data and analysts’ estimates.

An increase in the amount of policy loans coming due and demand for cash to be spent during the Chinese New Year, which takes place earlier in 2022, are drivers.

A recent reduction in the reserve-requirement ratio for banks could provide relief but some market watchers predict the central bank could ease again to avoid a liquidity crunch.

Cash tightness adds another headache for authorities grappling with the fallout of China Evergrande Group, which has led a wave of defaults with at least six developers failing to pay debts on time in the last quarter.

“There are a number of factors that may pose threats in January to the stable liquidity conditions the central bank has vowed to maintain,” said Yishuang Li, an analyst at Cinda Securities Ltd, citing tax payments and maturity of policy loans.

“The bond market is currently vulnerable after an increase of leverage in December, which means financial institutions will be more reliant on the People’s Bank of China’s (PBoC) liquidity support.”

Further policy easing will be a double-edged sword for PBoC. While such a move could soothe concerns about higher funding costs and prevent a liquidity squeeze, it may also fuel asset bubbles that Beijing wants to avoid.

Ahead of the Chinese New Year in 2019 and 2020, the authorities lowered the reserve ratio to pump in cash. However, they avoided supplying extra funds last year, stoking fears about a tighter policy stance and sending short-term funding costs soaring.

On Tuesday, the PBoC reduced its injection of short-term cash to 10 billion yuan (RM6.6bil) from 100 billion yuan (RM65.9bil) in the previous session. That resulted in a net liquidity drainage of 260 billion yuan (RM171bil), the most since early October.

Some 1.2 trillion yuan (RM790bil) of negotiable certificates of deposit – a form of short-term bank debt – will mature in January, along with 500 billion yuan (RM330bil) of medium-term policy loans and another 700 billion yuan (RM461bil) of reverse repurchase agreements, according to Bloomberg’s calculations.

Adding to the stress, 700 billion yuan (RM461bil) could be drained from the financial system for gifts and travel for the Chinese New Year holiday in the first week of February, according to Zhaopeng Xing, senior China strategist at Australia & New Zealand Banking Group Ltd (ANZ).

ANZ estimates that about one trillion yuan is required to meet tax obligations and banks may purchase a net 300 billion yuan (RM198bil) of local and central government bonds issued in January.

On top of that, Chinese property firms will need at least US$189bil (RM792bil) to cover maturing onshore bonds, trust products and wages to millions of migrant workers, according to Bloomberg’s calculations and analysts’ estimates.

This comes as the sector’s debt woes have shut most of it out of the offshore primary market for refinancing.

Even though most analysts foresee liquidity support, most don’t expect the PBoC to go as far as cutting the reserve ratio again or even lowering the policy interest rate. — Bloomberg

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