China Forced to Inject Record Amount of Money to Stimulate Economy
CHINA – January 17, 2019
China's central bank pumped a net 560 billion yuan ($83 billion) into its banking system on Wednesday — a record amount of money injected in one day.
This is another sign that the Chinese economy is facing enormous stress associated, on the one hand, with a huge debt burden, and on the other hand, with weakening economic growth, which does not allow to return the borrowed funds to the necessary extent.
Because of this, Chinese banks are short of liquidity, and the Central Bank of China is forced to save them. Officially, this action is explained by the peak of tax payments in this period (three weeks before the Chinese New year), because of which companies need cash money and actively take out a loan because the fiscal deposits in China are at a minimum.
Zhao Bowen, research director at Beijing-based Blue Stone Asset Management, said in a statement to CNBC that enterprises are expected to pay more than 1 trillion yuan in taxes this week, marking the peak period of tax payments. A historically low level of fiscal deposits and the expiration of 390 billion yuan in medium-term lending are also contributing to tighter financial conditions overall, he said.
"At the moment, the government's position is to push back against the downward pressure on the economy, and take a good first step at that in the first quarter," Zhao said. He added the central bank is also working to loosen overall credit conditions and coordinate its moves with an expected large issuance of local debt.
The previous record infusion, according to financial database Wind, took place in January 2016, when the Chinese economy was also experiencing problems. This time, the people's Bank of China did not even bother to explain the reasons for its actions, unlike the current situation.
Nevertheless, analysts again saw in the mass operation of the Central Bank of China not a temporary seasonal balancing, but a long-term stimulation of the economy.
The yield on the 10-year Chinese government bond fell below 3.1 percent on Wednesday afternoon, its lowest in more than two years, according to Wind. Yields fall when bond prices rise, and a decline in yields typically signals expectations of a slowdown in economic growth.
"At present, it is the peak of the tax period, and the total liquidity of the banking system is declining rather quickly," the People's Bank of China said in a statement on its website.
The central bank's record cash injection of 560 billion yuan into the banking system on Wednesday came through "reverse repurchase agreements," or buying short-term bonds from some commercial lenders so banks have more cash on hand. Sales of the bonds are called "repurchase agreements" and both measures comprise the central bank's "open market operations."
Chinese Premier Li Keqiang announced in January that the government is also cutting its reserve requirement ratio — the amount of cash that banks have to hold — later this month. There were four such cuts in 2018.
China has saved the economy this way a couple of times, and it works, though it’s not a solution, but merely a delaying of the problem, which is clearly seen in the situation with debts in China — the further, the stronger the share of non-performing loans and toxic assets. Defaults of Chinese companies and bonds are beating the record.
Perhaps, Beijing will succeed once more in “filling the problem” with money, but again — this is only a temporary solution.