China’s government has taken another exciting approach to keep its banking system afloat. Injections of short-term cash can increase overall liquidity, although there is only so much money to inject. As the injection pace speeds up, government bonds are on the rise, even if that momentum may not be sustainable.
China Keeps Printing Hard
There are only so many recourses for governments and central banks to address the current financial issues in their country. Printing more money and injecting it as cash into the economy is favorable for China. A seven-day reverse purchase agreement allowed the PBoC to inject 200 billion yuan – or $31 billion – of cash into the financial system.
Interestingly, the PBoC observed a shortage of liquidity in the interbank market. Not abnormal, as cash supplies tend to decrease as the year comes to a close. Banks will hoard all the cash they can to prepare for regulatory scrutiny. Addressing this pressure on the overall liquidity is crucial, although it also confirms the dire state of Chinese financial institutions today.
More interesting is how the PBoC reduced the reserve requirement ratio for all banks. The PBoC put that measure in place to ensure there would not be a cash liquidity issue. However, it seems that measure alone isn’t sufficient in China today. Roughly 10 billion yuan is coming due, and the injection of 200 billion yuan will offset that amount and then some. However, more liquidity also means devaluing existing cash supplies, which is never ideal.
The injection of cash has reduced the overall yield on 10-year government bonds in China. That yield now sits at 2.795%, the lowest rate since mid-2020. From a growth perspective, these metrics do not look too great. Moreover, the PBoC will likely continue to inject more cash over the coming days. It appears there are concerns regarding near-term growth curve projections. Injecting more liquidity is a short-term solution, but a long-term problem for the economy.