China Tipped to Boost Liquidity Again as Bank Tax Payments Loom

(Bloomberg) -- China's central bank is expected to resume cash injections to the financial system this month as tax demands on commercial lenders spur another round of tight liquidity.

The need for lenders to park corporate tax payments with the central bank could drain hundreds of billions of yuan in the second half of April, ending a period of relative calm in China's money markets. The People's Bank of China has refrained from adding cash to the system for nine days, the longest stretch since it started daily open-market operations at the beginning of last year, citing a relatively high level of liquidity.

“The central bank will probably have to resume the reverse-repurchase operations in the middle of this month on a cash shortage,” said Shen Bifan, an analyst in Shenzhen at First Capital's fixed income department. “Of course it can now tolerate a more volatile funding market, but when it really tightens, it will respond to it to avoid a cash crunch.”

Skipping reverse-repo auctions is part of the PBOC's campaign to reduce leverage in China's financial system. The pause in adding cash covered the quarter-end period -- a time when interbank liquidity usually tightens as lenders hoard funds to meet regulatory checks. That said, China's seven-day repo rate has fallen 57 basis points over the first two trading days in April, after surging to an almost two-year high on March 31.

“The liquidity won't be loose in April, but it'd also be difficult to see persistent tightness as well,” analysts led by Tang Yue at Industrial Securities wrote in a note Thursday.

Since March 24, when the PBOC stopped injecting cash, policy makers have withdrawn a net 420 billion yuan ($60.9 billion) from the system, data compiled by Bloomberg show. China's markets were closed April 3-4 for a holiday.

The seven-day repo, a gauge of of interbank funding availability, rose 15 basis points to 2.74 percent on Thursday, according to weighted average prices. The cost of one-year interest-rate swaps, the fixed payment to receive the seven-day repo rate, climbed one basis point to 3.58 percent.

To contact Bloomberg News staff for this story: Helen Sun in Shanghai at hsun30@bloomberg.net.

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Ron Harui, Emma O'Brien

With assistance from Helen Sun