China injected cash into the financial system by offering medium-term loans, in the government’s latest effort to ensure the country’s banks have sufficient liquidity.
The People’s Bank of China added 950 billion yuan ($145 billion) of one-year cash via the medium-term lending facility on Tuesday, more than offsetting the 600 billion yuan that matures in December. That’s the fifth straight month of net injections using the tool. It kept interest rates on the loans unchanged at 2.95%.
Demand for cash typically increases toward the end of the year, as banks withhold it for regulatory checks. This month, lenders also need another 2.4 trillion yuan to repay short-term interbank debt and buy newly issued government bonds.
The need to buoy the amount of liquidity in the financial system has becoming more pressing after a spate of corporate defaults squeezed lending in China’s interbank market. As the PBOC seeks to stabilize the amount of debt in the economy, its policy of tapering stimulus has pushed up money-market rates. Higher borrowing costs spilled over to government bonds, which are on track for an eighth month of losses. That would be their longest losing streak in 13 years.
In its monetary policy report released last month, the PBOC said the macro leverage ratio will likely stabilize, following comments from a deputy governor earlier in the month that exiting emergency support measures was only “a matter of time” and “necessary.” A gauge tracking China’s level of debt has surged to 277% of the country’s gross domestic output, the highest since Bloomberg started compiling the data in 2014.
Government bonds have continued to retreat this month, even after the PBOC unexpectedly added 200 million yuan via the MLF at the end of November. The yield on China’s 10-year notes still trades near the highest since May 2019.
The PBOC typically conducts MLF operations on or around 15th day of every month. Some 300 billion yuan of one-year funds matured on Dec. 7, and another 300 billion yuan will come due Dec. 16. Separately, the central bank on Tuesday drained a net 50 billion yuan in short-term funding by letting most of its seven-day reverse repurchase agreements mature.