China injects most liquidity in two months, triggering gains on bonds


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China increased its injection of short-term liquidity into the banking system to a two-month high as demand for liquidity increased before year-end. Government bonds won.

The People’s Bank of China added 200 billion yuan ($ 31 billion) in liquidity to the financial system through seven-day repurchase agreements, more than offsetting the upcoming 10 billion yuan. The yield on 10-year government bonds fell to 2.795%, the lowest level since June 2020.

The PBOC transaction came after an indicator of short-term borrowing costs rose the most in a year on Monday, a sign of liquidity shortages in the interbank market. The liquidity supply tends to tighten towards the end of the year as banks accumulate liquidity to prepare for regulatory checks.

“The large amount of injection will help ease the pressure on liquidity,” said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group Ltd. “There is a need to help financial institutions get through the end of the year smoothly.”

Earlier this month, the PBOC lowered the required reserve ratio in a bid to maintain a plentiful supply of liquidity and support the country’s economic recovery from the pandemic. At its quarterly meeting, the PBOC pledged to use monetary policy tools more “proactively” to support growth.

The seven-day repo rate fell 13 basis points to 2.29% at 5:07 p.m. local time after climbing 52 basis points on Monday. Costs on the same tenor’s contracts in the forex market fell 5.16%, from the highest close since January in the previous session.

“The net injection will likely continue for the rest of the week,” said Peiqian Liu, Chinese economist at Natwest Markets. As the PBOC’s rhetoric in December leaned in the conciliatory side, signaling Beijing’s concerns about the near-term growth prospects, China should be prepared to use widespread easing tools to help the economy, he said. -she adds.

(Updates with bond movements in the first and second paragraphs, updates to the sixth paragraph with the latest prices.)

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