China set to skirt Lunar New Year cash crunch on PBOC injection

Beijing: Chinese traders can likely write off an imminent cash squeeze from their list of worries, as banks look to have plenty of funds to lend around the upcoming Lunar New Year holiday.

China’s money market is usually at risk of a dry up in funding before the annual one-week break, as bank customers take more cash out than normal for gifts and travel. But the chance of a squeeze is smaller this year, with Beijing set to pump one trillion yuan into the financial system to help bolster the economy and Chinese people spend less amid a weak recovery.

The liquidity shortage before the holiday, which begins at the end of this week and heralds the Year of Dragon, will narrow 25% from previous years to about 1.5 trillion yuan, according to estimates from Australia and New Zealand Banking Group Ltd.

The gap, which can be mostly filled by the central bank’s cash injections, is seen as unlikely to trigger a jump in short-term borrowing costs – something which has happened in around eight out of the past 10 years.

“I’m much less concerned about liquidity in the first quarter” due to the recent front-loading of lending and a weaker government bond issuance pipeline in the first few months this year, said Becky Liu, head of China macro strategy at Standard Chartered Bank.

“We could become more concerned in the second quarter when loan growth is likely to pick up”, alongside issuance.

An absence of liquidity jitters will be welcomed by policymakers, who are struggling to repair market confidence amid a stock-market slump.

But the mismatch between Beijing’s dripfeed monetary easing and investor hopes for a bazooka stimulus package may continue to dent sentiment beyond the Lunar New Year break.

During this year’s holiday season, the gloominess is expected to lead to a drop in cash gifts, which are usually red envelopes packed with bills and given to family members for good fortune.

Stone Zhang, a 32-year-old self-employed resident of the northwestern Gansu province, is one of those who will refrain from taking cash from his bank account.

“I really don’t have money to hand out,” said Zhang, who lost 90,000 yuan in stock investments last year. “I don’t plan to give my parents red packets now, though I used to give them 3,000 to 5,000 yuan during previous Lunar New Year holidays.”

On top of lower cash demand, funding conditions got a boost from the central bank’s liquidity infusion just five days before the Lunar New Year. The People’s Bank of China (PBOC) has rarely made such a broad easing move so close to the break.

And last Friday, the PBOC pumped 14-day liquidity into the financial system for the first time since late December, another sign that policymakers are aiming to smooth out any swings in funding costs during the holiday season.

Immediately after the Lunar New Year, traders will focus on whether Beijing will cut the interest rate on the so-called Medium-term Lending Facility, after the central bank disappointed investors by holding it steady in January.

And authorities are expected to maintain abundant liquidity with more pro-growth easing measures, with possible rate cuts in the next few months and another reserve requirement ratio cut in the pipeline, analysts said.

“Keeping liquidity conditions loose will support credit generation whenever demand picks up again,” said Louise Loo, lead economist at Oxford Economics Ltd.