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JAKARTA (TheInsiderStories) – The People’s Bank of China (PBOC) added 280 billion yuan (US$40 billion) into the financial system with 7- and 14-day reverse repurchase agreements Thursday (12/19), while keeping the interest rates unchanged. Its the most liquidity via open-market operations since January, in a push to ensure ample cash supply ahead of seasonal tightness at year-end.

That came after the authorities restarted such operations after a 20-day hiatus on Wednesday. The overnight repo rate, an indicator of interbank liquidity, plunged the most in a month amid the injection while the benchmark seven-day rate saw its biggest decline since Dec. 2.

The nation typically sees tighter liquidity toward the end of a year, when banks are less willing to lend as they need funds for regulatory checks. Cash supply could tighten further in January, as residents across the country take out money to prepare for the Lunar New Year holiday. The liquidity drainage may prompt the PBOC next month to reduce the reserve requirement ratio, providing a boost to the sleepy bond market.

The PBOC cut the rate on medium-term loans in November for the first time since 2016 and lowered the rate on seven-day reverse repos on Nov. 18. It reduced the 14-day rate Wednesday to reflect the earlier policy moves.

At that time, the central bank extended $28.60 billion through its medium-term lending facility to add long-term funds (LPR) caught the market off guard as the central bank had already injected 400 billion yuan a prior week.

Based on the official statement released on Nov. 20, the one-year LPR fell five basis points to 4.15 percent from 4.20 percent in October and the five-year LPR was lowered by the same margin to 4.80 percent from 4.85 percent. The governor said China will continue to implement a prudent monetary policy and see banks contribute more to financing the real economy.

The adjustment from the PBoC signals the continuation of the stimulus policies adopted by policymakers, even amid increasing evidence that economic growth will drop below 6 percent next year. In the latest report, the central bank warned about the risks of economic growth and rising inflation.

In response to this, the Chinese central bank said it will increase counter-cycle adjustments while avoiding the use of large stimulus policies. Efforts must be intensified to prevent the spread of inflation expectations.

The PBoC has refrained from aggressive easing amid accelerating inflation and worries about debt buildup. The higher-ups have promised to maintain prudent monetary policy while achieving the right balance between tightening and easing.

Previously, director-general of the monetary policy department, Ruan Jianhong, said since the beginning of 2019, in line with the arrangements of the Communist Party of China Central Committee and the State Council, the PBoC has stuck to sound monetary policy.

Overall, he noted, the liquidity in the banking system is reasonably adequate, money, credit and aggregate financing to the real economy (AFRE) has seen moderate growth, and market interest rates have been in stable operation.

According to preliminary statistics, he explained, the AFRE growth in September was RMB2.27 trillion, expanding by RMB138.3 billion year on year. At end-September, outstanding AFRE reached RMB219.04 trillion, rising by 10.8 percent year on year, 0.2 percentage points higher than a year earlier, he adds.

Turning to foreign exchange reserves and the exchange rate, at end-September, China’ reserves stood at $3.09 trillion, and the US Dollar versus CNY exchange rate was 7.0729.

The central bank expects progressive development characterized by,”385”, which means for large banks, the proportion of new loans using LPR as the reference rate should reach 30 percent in the third quarter, 50 percent by the fourth quarter, and over 80 percent by the first quarter of 2020.

Since early 2019, PBoC injected the largest amount of money RMB560 billion ($82.84 billion) to stimulate the slowdown economy. Recently the country’s economy moved lackadaisically, impacted by its trade war with the US. PBoC stated, that the injection of funds was done to maintain adequate bank liquidity and anticipating the high funding needs.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com