(Bloomberg) -- China’s cash squeeze extended with some signs of disruption to trading, as a liquidity infusion from Beijing failed to counteract a spike in demand for funds.
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The volume-weighted average rate of seven-day repurchase transactions in the money market, a gauge of borrowing costs, climbed to 2.32%, the highest since October 2023. Late Wednesday there were some failed trades and a 10 minute delay to the official close of a clearing system, according to traders who asked not to be identified as they are not allowed to speak publicly.
The People’s Bank of China injected another 336.4 billion yuan ($45.9 billion) of short-term funds into the banking system on Thursday, following its second largest ever cash infusion in the previous session. That was aimed at offsetting the impact of the expiration of medium-term lending, peak tax season and cash demand before Lunar New Year holidays, and to keep liquidity ample, it said in a statement.
China’s week-long Lunar New Year holiday begins this year on January 28.
Complicating matters for the PBOC is pressure on the yuan and government bond yields from concerns about China’s economic prospects as a potential trade war looms. Authorities may be reluctant to loosen liquidity too much lest it weigh further on the currency and yields, and induce capital outflows.
Seven-day liquidity “may be disappointing to the market although hope remains for longer-term liquidity injection later this month,” said Frances Cheung, head of FX & rates strategy at Oversea-Chinese Banking Corp. “We expect additional liquidity injections next week but that may only be enough to meet demand, not necessarily loosening the condition a lot.”
The PBOC has injected more than one trillion yuan of liquidity to the market through reverse repo operations from Monday to Wednesday, which is equivalent to the effect of a reserve requirement ratio cut of 0.5 percentage points, according to a commentary from state broadcaster China Central Television. That suggests it is already on the way to implement moderately loose monetary policy, it said.
Daily trading volume for so-called overnight pledged repurchase agreements declined for a seventh straight session on Wednesday to 4.6 trillion yuan, a sign of shrinking liquidity in the market. The gap between repo rates of whole-market deals and among-bank trades has been widening in the past few sessions, indicating funding pressure could be worse for non-bank financial institutions including fund houses, securities firms and wealth managers.