China Ramps Up Liquidity Injection Amid Bond Market Turmoil

(Bloomberg) — China’s central bank pumped more cash than forecast into the banking system in December, in a move that’s expected to bolster bonds roiled by the nation’s abrupt Covid policy shift.

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The People’s Bank of China injected 650 billion yuan ($94 billion) via its one-year medium-term lending facility on Thursday, more than the 500 billion yuan due this month. Five out of the eight economists surveyed by Bloomberg prior to the operation expected a rollover of just the maturing amount. It’s the first net injection of cash via MLF since March.

“The liquidity injection following the 25 basis points reserve requirement ratio cut suggests continued easy monetary policy stance and the desire to further support credit growth,” said Becky Liu, head of China macro strategy at Standard Chartered Bank in Hong Kong.

China’s benchmark 10-year bond yield was little changed, while the onshore yuan edged lower to around 6.96 per dollar.

The liquidity support could ease the stress on money markets caused by a reopening-led selloff in bonds and heavy debt redemptions by retail investors. The rate on one-year AAA rated negotiable certificates of deposits, a gauge of short-term interbank borrowing costs, had jumped to around 2.8% in the run-up to the PBOC decision, rising above the MLF rate for the first time since April 2021 and underscoring the need for additional cash.

The move may also help facilitate lending as the economy suffers from disruptions caused by a spike in Covid infections. Data released shortly after the PBOC operation shows worsening activity in November amid widespread Covid outbreaks and restrictions. Retail sales contracted 5.9% last month from a year ago, while industrial output growth slowed to 2.2%.

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“The signal from the December Politburo committee meeting is clear, that monetary policy will be more effective and forceful, suggesting more room for support to last until at least 1Q,” Liu said, adding that the market is still watching for a possible cut in loan prime rates next week.

The one-year MLF rate was kept unchanged at 2.75%, as forecast by all economists in the survey. The MLF rate acts as a reference for banks for their benchmark loan prime rates, the decision on which is expected on December 20.

–With assistance from Fran Wang and Yujing Liu.

(Updates with latest economic data release in sixth paragraph.)

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