CHINA’S central bank injected massive liquidity into the market at the end of 2024 without using high-profile stimulus, as officials preserve policy space before US president-elect Donald Trump returns to office.
The People’s Bank of China (PBOC) previously flagged it could free more cash for banks by cutting the reserve requirement ratio (RRR) again one more time by the end of 2024. It’s now expected to make that move in the first quarter of this year, keeping officials’ powder dry on a closely watched tool that could alleviate the negative impact from fresh US tariffs.
To ensure the market has enough liquidity, the PBOC instead last month injected 1.7 trillion yuan (S$317 billion) of cash to banks via the outright reverse repo and government bond purchases. That operation exceeded the largest amount of monthly one-year loans ever provided via the medium-term lending facility (MLF) – previously the PBOC’s flagship tool for liquidity injections that’s now heading into retirement.
That move helped mitigate a record withdrawal of liquidity via the MLF last month, resulting in a net addition of cash of 550 billion yuan – equivalent to the impact of a 25-basis-point cut to the RRR, according to analysts.
“RRR cut has been assigned the role of countering tariff risks and stabilising markets, so it will mostly likely be delayed until US imposes higher tariffs,” said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group, adding that he sees a potential window ahead of the Chinese New Year holiday, which starts on Jan 28.
China’s economy has shown signs of recovery after officials rolled out a broad package of stimulus since late September, but the growth outlook remains challenging due to a possible second trade war with the US. Top leaders have signalled a more supportive stance regarding liquidity in 2025, in order to ensure banks have enough money to lend to the economy. A rise in government bond sales in the coming years would also require cash in the market to absorb the notes.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Currency, bond
The PBOC has several reasons to go slowly on lowering the amount of cash banks keep in reserve, including its need to stabilise the yuan and avoid fuelling another rally in the government bond market.
A RRR cut – which is typically used only sparingly – could add more pressure to the Chinese currency because it sends a strong signal of monetary easing. That could lead to a reduction in yuan assets’ yields compared with US dollar assets and drive capital outflow.
If the Federal Reserve sends a more dovish signal in January, there could be greater space for China to cut the RRR ahead of the Chinese New Year, according to Bruce Pang, a distinguished senior research fellow at the National Institution for Finance and Development, a think tank.
The central bank has also signalled its discomfort with a record-setting sovereign bond rally after yields plummeted to historic lows. Adding too much liquidity could encourage investors to pile into the bonds.
Liquidity often gets tight at the end of the first quarter, so that could be when the officials eventually decide to pull the trigger on another RRR cut, said Zhou Hao, chief economist at Guotai Junan International.
China’s top policymakers pledged to adopt a “moderately loose” monetary policy in 2025, moving away from a “prudent” stance that held for 14 years. The PBOC is also revamping its toolbox in order to influence markets more effectively and flexibly.
“Substantial action will be necessary to effectively stimulate demand in 2025,” said Carlos Casanova, senior Asia economist at Union Bancaire Privee. “In addition to sustained liquidity support, we expect the bank to expand its balance sheet significantly and won’t rule out the possibility of outright equity purchases.” BLOOMBERG
