Central bank gives liquidity injection

Experts expect continuation in flexible policy fine-tuning to prevent risks

The central bank injected liquidity through open market operations on Tuesday to stabilize the market and strengthen investors’ confidence, as experts expected flexible policy fine-tuning may continue to prevent risks.

The People’s Bank of China, the central bank, launched a 100 billion yuan ($15.4 billion) reverse repurchase and 200 billion yuan medium-term lending facility on Tuesday, in order to “supplement the medium to long-term liquidity gap”, according to a statement published on its website.

The move is also to offset influences from the tax payment peak, the payment of government bonds and the expiry of central bank’s earlier reverse repurchase, said an official from the central bank’s monetary policy department, as all the factors together could result in a sharp decrease in interbank liquidity.

It signaled that policy finetuning may continue in the future, including a possible easing of the reserve requirement ratio — the cash amount that should be reserved in financial institutions, to avoid risks rising after an effective financial deleveraging process this year, said Lu Zhengwei, chief economist with Industrial Bank.

This set of open market operations was launched before the stock market opened, but the benchmark index, the Shanghai Composite Index, still retreated 3.78 percent to a two-year low at the close, amid concerns over Sino-US trade tensions.

Xu Zhong, director of the central bank’s research bureau, wrote in a working paper published on Tuesday that banks’ RRR should be appropriately lowered to ease the burden on the nation’s financial institutions.

“However, as China is still a developing country, it is still necessary to keep the RRR at relatively high levels,” it said.

A day earlier, the PBOC issued a separate statement on its website, indicating that liquidity in China’s interbank market has remained reasonable and stable, and credit growth has been moderate.

“The PBOC will continue to pay close attention to both internal and other economic and financial trends, to implement a prudential and neutral monetary policy, strengthen forecasting and step up efforts in policy fine-tuning,” it said.

The policy is targeting to support real economic growth, especially for small and microsized firms, and to stabilize market expectations while improving financial reform and opening-up. “We will take effective measures in response to possible external shocks”, according to the PBOC.

Sheng Songcheng, an adviser to the central bank, said that the financial deleveraging has resulted in a tightening financial environment, and the effects have transferred into the real economy from the financial market. One of the signs is that the growth rate of total social financing, a broad measure of funds that non-financial firms and households get from the financial system, has started to moderate.

“Targeted RRR cut and MLFs could be monetary policy tools for the fine-tuning,” said Sheng. “But the monetary policy should not be broadly eased or all the previous efforts of deleveraging will be wasted.”