E China's Liquidity Strains

“On Wednesday (Jan.16,2020), the Chinese central bank injected a net 560 billion yuan ($83 billion) into the banking system, the highest ever recorded for a single day. At present, it is the peak of the tax period, and the total liquidity of the banking system is declining rather quickly, the central bank said in a statement on its website. In the afternoon, the yield on the 10-year Chinese government bond fell below 3.1 percent to its lowest in more than two years, according to financial database Wind.” (MSNBC, Jan. 16, 2020)

“China may have to cut taxes, boost spending and slash interest rates to prevent the coronavirus outbreak wreaking havoc on an already fragile economy. The economic impact of the virus is still impossible to determine, but one state media outlet and some economists have said that China's growth rate could drop two percentage points this quarter because of the outbreak, which has brought large parts of the country to a standstill. A decline on that scale could mean $62 billion in lost growth.” (CNN, Jan 24, 2020)

Although it is not widely known, many large Chinese companies were experiencing sluggish growth late last year which resulted in increased financing difficulties.

The liquidity squeeze in January was made worse since it occurred in advance of the Chinese New Year holiday when most companies shut down for at least a week. As reported in the Feb. 4th Daily Shot report, China’s central bank (the PBoC) was forced to inject a huge amount of liquidity into the financial system as the markets reopened after the Lunar New Year holidays.

In response to the weaker situation, China’s government also cut the required reserve ratio, the amount of cash the banks must hold. Previously, there were four cuts in the reserve ratio in 2018.

China’s central bank also indicated that it would inject 1.2 Trillion-Yuan ($174 billion the US) worth of liquidity into the markets via reverse repo operations as its stock markets opened amid the outbreak of the new coronavirus.

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