China Injects $2 Billion Into Banking System as Loans Mature

(Bloomberg) -- China injected liquidity into the financial system by offering medium-term loans to banks, in the government's latest effort to support economic growth. It kept interest rates on the loans unchanged.

The People's Bank of China added 300 billion yuan ($43 billion) through the medium-term lending facility, with 286 billion yuan used to roll over loans coming due on Monday. It offered the one-year loans at 3.25%, according to a statement. The central bank refrained from injecting cash through reverse repurchase operations for a 19th session on Monday, the longest hiatus in a year.

The need to buoy the economy may have become less pressing for China after authorities agreed to the first phase of a broader trade deal with the U.S. The deal will involve reduced U.S. tariffs in exchange for more Chinese purchases of American farm goods such as soybeans and pork as well as commitments on intellectual property, forced technology transfer and currency markets.

Demand for cash typically increases toward the end of the year, as banks withhold it for regulatory checks. Liquidity conditions are set to become more volatile next month, as individuals and corporates withdraw funds to prepare for the week-long Lunar New Year break.

“The PBOC hopes to ensure liquidity is ample before year-end,” said Ding Shuang, chief China and North Asia economist at Standard Chartered Bank Ltd. “The central bank will very likely inject more cash via MLF and reduce banks' reserve ratio next month in order to prevent tightness before the holiday and offset any liquidity drainage resulting from local governments' bond sales.”

China's government bonds and money market rates barely reacted to the PBOC's injection, suggesting the move was largely priced in. The benchmark 10-year sovereign yield was little changed at 3.20% as of 4:25 p.m. in Shanghai. The yield has moved in a narrow band of 5 basis points over the past month.

Chinese authorities added $16 billion into the banking system with MLF on Dec. 6, and released $29 billion on Nov. 15. The central bank also lowered the cost on the loans in November.

Economic growth showed signs of stabilizing in November, according to data released Monday. Industrial output rose 6.2% from a year earlier, versus a median estimate of 5%. Retail sales increased 8%, compared to a 7.6% projection.

To contact the reporter on this story: Tian Chen in Hong Kong at tchen259@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Philip Glamann