Heading into the Chinese Lunar New Year, local banks are suddenly starved for liquidity like never before. On Tuesday China’s benchmark money-market rate jumped the most in two years, with unprecedented cash injections by the central bank being overwhelmed by demand before the Lunar New Year holidays.
Demand for cash in China tends to increase before the Lunar New Year holidays, when households withdraw money to pay for gifts and get-togethers. Month-end corporate tax payments are adding to the pressure this time, with the break running from Jan. 27 through Feb. 2. At that point the PBOC usually steps in with liquidity "injections" in the form of reverse repos. However, what it has done this year is literally off the charts.
On Wednesday, the People’s Bank of China put in a net 410 billion yuan ($60 billion) through open-market operations, the biggest daily "injection" on record. Despite this massive boost in liquidity, the interbank seven-day repurchase rate still jumped 35 basis points, the most since December 2014, to 2.76 percent, according to weighted average prices. Yesterday, the overnight repo rate rose 10 basis points to 2.50 percent, the highest since April 2015, according to weighted average prices.
So, with liquidity still scarce, moments ago on Thursday morning, the PBOC added another net injection of 190 billion consisting of 100Bn in 7-day repo and 150BN in 28-day repos, offset by 60bn yuan in previous loans maturing.
As a result, the PBOC has injected a net of 1.035 trillion yuan via reverse repos so far this week, an all time high.
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