China's central bank has infused nearly $131 billion into its financial system, marking one of its largest liquidity injections on record. The move comes as the People's Bank of China (PBOC) works to address heightened demand for cash ahead of the Lunar New Year while simultaneously shoring up the embattled yuan.
The PBOC on Wednesday injected 959.5 billion yuan via seven-day reverse repurchase agreements, representing the second-largest such operation in its history, according to data from Wind, a Chinese financial data provider. This step aims to offset the expiration of medium-term lending facility (MLF) loans, which totaled 955 billion yuan in January, and meet seasonal cash demand, the central bank said.
The Lunar New Year, which begins January 28 this year, traditionally leads to a surge in cash withdrawals as Chinese households prepare for gift-giving and holiday shopping. This annual demand for liquidity has added strain to China's banking system, with interbank borrowing rates reaching their highest levels in more than a year earlier this week.
The PBOC's intervention provided some relief, lowering the seven-day repo rate-a key benchmark for interbank borrowing costs-by as much as 70 basis points. Economists say this action underscores the central bank's willingness to use targeted tools to maintain market stability without resorting to broader measures, such as cuts to interest rates or the reserve requirement ratio.
The liquidity injection also highlights the central bank's efforts to stabilize the yuan, which has come under pressure from a strong U.S. dollar and concerns over potential trade tariffs. On the same day, the PBOC sold a record 60 billion yuan of six-month bills in Hong Kong, draining liquidity from offshore markets to support demand for the currency.
While these measures address immediate concerns, they underscore the delicate balancing act facing Chinese policymakers. The PBOC must navigate the dual challenges of maintaining ample liquidity for domestic needs and defending the yuan's value without triggering excessive market volatility.
Economists have noted the central bank's evolving strategy in recent months, which has shifted away from traditional tools like MLF loans and toward short-term instruments such as reverse repurchase agreements. This approach allows the PBOC to address market fluctuations more flexibly while keeping more significant policy moves, such as reserve requirement ratio cuts, in reserve for potential future use.
Despite the scale of the recent injection, analysts continue to anticipate additional easing measures in the coming months. Wei He, an analyst at Gavekal Dragonomics, noted that PBOC Governor Pan Gongsheng has demonstrated a willingness to exceed market expectations in his interventions. "There is a growing chance that in 2025, he might take extraordinary steps to boost market sentiment, such as a major one-off interest-rate cut," Wei said.
Policymakers are under increasing pressure to implement measures that address broader economic challenges. Slowing growth, mounting debt levels, and global uncertainties have weighed on investor confidence, prompting calls for a more coordinated fiscal and monetary response.
The PBOC's actions this week, while significant, are seen as part of a broader strategy to ensure liquidity and economic stability during a critical period. However, the long-term effectiveness of these measures will depend on the central bank's ability to balance competing priorities without exacerbating financial imbalances.