China Capitulates: Injects $25 Billion Into Liquidity-Starved Banks To “Appease Investors”
That is the question following last night’s dramatic reversal in recent PBOC liquidity moves, when after weeks of mostly draining liquidity, the central bank injected a whopping 170 billion yuan (net of maturities), or $24.7 billion, the biggest one-day cash injection into the country’s financial markets (and contracting shadow banking system as first reported here last week, when we showed the first drop in China Entrusted Loans in a decade) in four months. The surprising move was “a fresh sign that Beijing is trying to mitigate the damage to investor confidence inflicted by its recent campaign to tamp down speculation fueled by excessive borrowing” according to the WSJ.
Today’s injection was the the largest since just before the Lunar New Year holiday in January, when Chinese banks traditionally stock up on liquidity.
Why the sudden shift?
On one hand it is possible that the PBOC is simple concerned about the sharp decline, and in fact contraction, in China’s shadow banking system, where as we showed last week Entrusted Loans posted their first decline since 2007 even as China’s M2 continued to decline.
The huge cash injection followed comments from Chinese officials in recent days which hinted they are getting concerned that recent moves to tighten market regulation have caused too much disruption. As a reminder, in recent weeks money market rates and yields on corporate bonds had all shot up to multi-year highs.
The real reason may be simpler: with a major leadership shuffle due later this year, the central bank is not taking even the smallest chances of turmoil in the banking sector. and as such admitted that – once again like in 2013 – its posturing to delever the world’s most leveraged financial system was just that. The WSJ has more:
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