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China Ramps Up Longer-Term Cash Boost With Bonds Under Pressure

(Bloomberg) -- China dialed up its injection of longer term liquidity into its financial system in a move that’s likely intended at easing the selloff in bonds and ensuring adequate funding for the flailing economy.

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The People’s Bank of China added a net 600 billion yuan ($84 billion) via its one-year medium-term facility as well as three and six-month outright reverse repos this month, the most since January, as per Bloomberg calculations. China’s overnight money market rate fell while bond futures rose in response to the move.

The measures underscore Beijing’s desire to retain stable funding conditions and facilitate government borrowing, after investors demanded the highest yields since December at a 30-year auction. It could also cool any redemption pressure on bond funds and avert spiraling losses as investors rush to buy stocks.

The PBOC will keep up its longer-term liquidity injections to ensure smooth issuance of government bonds and to foster an increase in bank loans, said Wang Qing, chief macro analyst at Golden Credit Rating Co. It “reassures market of a growth-supportive monetary policy stance.”

The PBOC indicated it’s holding back from aggressively easing monetary policy with moves such as interest-rate cuts, but pledged targeted support for the economy. Policymakers have also been cautious of using more forceful easing measures like — cutting the amount of cash banks need to keep as reserve, or purchasing government bonds — amid its efforts to quell deflation.

That along with a tax on bonds’ interest income has weighed on investor appetite for sovereign debt. However, the central bank has been making a steady stream of short-term cash infusions to support the market.

Liquidity injections via MLF and outright reverse repo, the main instruments in PBOC’s toolkit after an overhaul earlier this year, are likely to help the central bank maintain ample cash conditions to support growth. That’s especially at a time when the relentless rally in stocks threatens to draw funds from household savings at banks and induce liquidity stress.

China’s overnight repo rate fell seven basis points to 1.35% on Monday. Futures on 30-year bonds rose as much as 0.7%, their biggest gain since April.