By Joe Cash
BEIJING (Reuters) – On Monday, China’s central bank introduced a new lending tool designed to inject additional liquidity into the financial market and support credit flow within the banking system, particularly in anticipation of the expiration of trillions of yuan in loans at the year’s end.
The People’s Bank of China (PBOC) announced the activation of the open market outright reverse repo operations facility, which aims to maintain adequate liquidity levels in the banking system and enhance the central bank’s policy options.
A total of 2.9 trillion yuan ($406.58 billion) in medium-term loans are scheduled to mature between now and the end of December, potentially complicating banks’ efforts to finance investments and stimulate growth in the world’s second-largest economy.
Although the new tool took effect on the same day, it was not mentioned in the PBOC’s open market operations statement released on Monday.
In a separate statement, the PBOC indicated it would conduct trades with primary dealers within the open market operations on a monthly basis using the new facility.
The statement also clarified that the new tool would have a tenor of less than one year, longer than the typical tenors of seven, 14, or 28 days for regular reverse repo operations, which are conducted daily and generally require collateral.
These operations are expected to enable the central bank to generate funds through commercial banks purchasing securities with the intention of reselling them in the future at a profit.
The Chinese government is relying on a significant financial stimulus announced in September to boost lending and investment, as a deep property market decline and weak consumer confidence impact investor sentiment.
The PBOC, which has consistently lowered interest rates and injected liquidity, faces pressure to implement further measures to achieve the government’s economic growth target of around 5% for the year.
According to an article by the state-owned Shanghai Securities News, published soon after the PBOC’s announcement, the new tool will cover three- and six-month tenors and assist with liquidity adjustments over the coming year, citing individuals familiar with the central bank’s plans.
“The central bank’s decision to introduce this new tool at this juncture is also expected to provide a better hedge against the concentrated expiry of the medium-term lending facility before the year’s end,” the article added.
($1 = 7.1326 yuan)