China Pours Cash Into System to Soothe Markets, Ease Tax Funding

(Bloomberg) — China’s central bank pumped cash into the banking system this week to meet an increased demand to fund tax payments and also boost bruised sentiment in the aftermath of the party congress.

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The People’s Bank of China injected a net 840 billion yuan ($116 billion) via seven-day reverse repurchase agreements, the second-highest amount this year, according to Bloomberg calculations. Daily injections spiked on Tuesday after a gauge of China stocks posted a record plunge amid concerns over the economic impact of President Xi Jinping’s consolidation of power and likely continuation of policies such as Covid Zero.

Seasonally high demand for cash at month-end, October corporate tax payments and increased local government bond issuance may have contributed to the liquidity boost. However, the move still underscores China’s accommodative stance as the world’s second-largest economy faces headwinds, with growth now seen below 5% for each year through 2024.

“The PBOC had to fill in the larger liquidity gap as it is yet too early to tighten liquidity conditions,” said Becky Liu, head of China macro strategy at Standard Chartered Bank. The accommodative stance will sustain to boost China’s fragile economy amid weak internal demand and property market risks, she added.

Liu also sees the possibility of China cutting the amount of cash banks need to hold as reserves next month to replace some maturing policy loans at a lower funding cost. That would allow them to increase lending to the economy, she said.

Her view was echoed by analysts at Guotai Junan International and Australian & New Zealand Banking Group, who see China’s economy staying under pressure despite data showing a rebound in the last quarter.

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The scope of a possible reserve requirement ratio cut has cheered China bonds, according to Qin Han, a fixed-income analyst at Guotai Junan, who expects local money market rates to fall in November following the October tax payments.

China’s 10-year government bond yield dropped to 2.69% this week, the lowest in about a month while the seven-day repo rate, a gauge of borrowing costs among lenders, fell for the first day in nine on Friday.

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