Chinese central bank injects massive funds to bolster economy

China's central bank completed its largest weekly injection of funds into China's banking system on Thursday, aiming to give banks the liquidity they need to support the economy following the weakest month for bank lending in a year.

hidden August 23, 2012 10:51:45 IST
Chinese central bank injects massive funds to bolster economy

China's central bank completed its largest weekly injection of funds into China's banking system on Thursday, aiming to give banks the liquidity they need to support the economy following the weakest month for bank lending in a year.

In a move that traders and analysts see as a substitute for a cut in banks' required reserve ratio (RRR), the People's Bank of China (PBOC) injected a net 278 billion yuan into the interbank money market this week, the largest net injection since early January.

Through last week, traders and analysts had widely expected that an RRR cut was imminent, and many analysts still believe a cut is needed to give banks the liquidity they need to boost lending.

Chinese central bank injects massive funds to bolster economy

Reuters

PBOC's decision to inject the funds through open market operations, rather than a cut in RRR, indicates the central bank's abdiding concern about stoking inflation.

The PBOC's choice of monetary policy tools reflects "an emphasis on structural adjustment and a worry about house price rebounds," Ma Yun, economist at CEBM, a Chinese macro-economic consultancy, wrote in a note to clients.

New yuan loans totalled only 540 billion yuan in July, the lowest monthly total since July 2011. Exports and industrial output data also indicated broad weakness in the economy.

House prices have now risen for two straight months on a monthly basis, following eight consecutive monthly declines resulting from Beijing's campaign to bring prices down. Prices of agricultural produce have also crept up for five straight weeks, Ministry of Commerce data shows.

"The difference between 'RRR cut plus forward repos' and reverse repos is that reverse repos offer more flexibility and precision," Ma wrote.

The flexibility comes from the fact that reverse repos are short-term-either seven-or 14-days-so their effect is temporary. They can also be targeted at specific banks in need of liquidity.

By contrast, an RRR cut affects all banks and is effectively permanent unless the central bank moves actively to reverse it.

Reuters

Updated Date:

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