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China’s central bank injected a record amount of short-term funds into the financial system this week to prevent the cash crunch that usually accompanies the Lunar New Year holiday.
To mitigate seasonal fluctuations, 220 million yuan (about $300 billion) of cash was injected through a 14-day reserve repurchase agreement, a short-term liquidity facility, just as millions of residents prepared to go home, pay taxes and On the occasion of handing out cash – fill the red envelopes.
While these capital injections are common during the holidays, the scale of this week’s operations tempered expectations of an imminent cut to banks’ reserve ratios, the level of reserves banks must hold.
In recent months, the People’s Bank of China has repeatedly said it would lower the ratio “at the appropriate time” to restore confidence in the economy. In order to stimulate growth, China has also adjusted its monetary policy stance from “stable” to “moderately loose.”
The cut in the reserve requirement ratio is widely seen as a major easing move aimed at boosting long-term credit.
“Given the current liquidity situation and broader macroeconomic conditions, the prospect of an RRR cut before the Lunar New Year seems slim,” said Wang Qing, chief macroeconomic analyst at Jincheng.
“The central bank also injected a large amount of medium-term liquidity into the market in advance in December, keeping the system well-supplied but not excessive.”
Analysts said the delay in cutting interest rates reflected a complicated balancing act by China’s central bank, which is keen to retain its tools in what is expected to be a challenging year for the economy. China’s real estate market has been hit by a protracted crisis and companies are bracing for the impact of Donald Trump’s protectionist policies.
Zhi Xiaojia, chief China economist at Credit Agricole, said that considering the strong signal sent by the RRR cut and the limited space for further RRR cuts, the central bank hopes to “reserve some bullets for future signaling effects.” The average deposit reserve ratio of banks in China is 6.6%.
Lynn Song, chief economist at ING Greater China, said the People’s Bank of China is expected to rely more on open market operations to manage liquidity in 2025, rather than cutting benchmark policy rates or deposit reserve ratios. “Significant major changes in interest rates and reserve requirements may be reserved for a more appropriate time.”
Beijing is trying to reflationate the world’s second-largest economy as deflationary pressures mount and the real estate sector remains in deep trouble. But it also wants to avoid further devaluation of the yuan.
The offshore yuan has been under pressure since Trump won the presidential election in early November, falling 3% against the dollar, while the tightly controlled onshore yuan hovered near 16-month lows at the start of the year before rebounding recently.
The potential escalation of trade tensions between China and the United States has heightened concerns about capital outflows and limited the ability of the Chinese central bank to cut interest rates.
An internal briefing memo released this week by a state-owned bank seen by the Financial Times said that “recent pressure on the yuan exchange rate will limit the monetary easing measures of the People’s Bank of China”. “The central bank is also using subtle actions at this stage to moderate market expectations of further easing.”
Since December, the central bank has set a strong daily reference rate against the yuan, issued offshore bills and stopped buying government bonds. Larry Hu, chief China economist at Macquarie, said this showed the Chinese central bank was prioritizing monetary stability over other growth-promoting goals.
“Last year, the People’s Bank of China adopted a strategy we called ‘hold on until the Fed blinks,'” Hu said. “Now, as the dollar strengthens and the renminbi comes under pressure, the People’s Bank of China must once again hold on to the renminbi until the dollar weakens. RMB stability is more important than other policy goals at the moment.
However, some analysts said they believed more substantial steps were imminent after the Lunar New Year holiday and that China’s central bank could choose the tools at its disposal.
“The People’s Bank of China could consider some measures, including direct reverse repos of various maturities, net purchases of government bonds and lowering the deposit reserve ratio,” Crédit Agricole’s branch said.
