Fears that increasing capital outflows have tightened liquidity in the China’s financial markets have led the People’s Bank of China to increase the money supply.
China’s central bank injected 120 billion yuan ($18.7 billion) worth of seven-day reverse repurchase agreements, or short-term loans to commercial lenders, into the interbank market on Tuesday, reported China Daily. It was the largest single-day injection by the central bank since January 2014, when the PBOC offered 150 billion yuan via 14-day reverse repos. The interest rate remained the same at 2.5%.
China’s capital outflows hit a four-month high in July. Net sales of foreign exchange were worth 265.5 billion yuan last month, compared with a net purchase of 1.02 trillion yuan in June and 7.8 billion yuan in May, according to the State Administration of Foreign Exchange.
Economists blamed a combination of factors for pulling liquidity out of China, from July’s poor export growth and pressure to devalue the yuan, to an expected rise in US interest rates.
The Wall Street Journal said the large cash injection shows the central bank is concerned about money leaving China. This increases the pressure for more monetary easing or yuan depreciation, or both.
Li Qilin, an analyst at Minsheng Securities, told China Daily that the central bank’s previous intervention to stabilize the currency by selling foreign exchange had also led to liquidity tightening and the propping up of the interbank lending rate.
Avoiding depreciation expectations and capital outflows has become more important for the government in determining its next monetary step, Wang Tao, chief economist in China at Swiss firm UBS AG, told China Daily.
On the flip side, the reform is “a welcome step as it should allow market forces to have a greater role in determining the exchange rate,” Markus Rodlauer, the International Monetary Fund’s mission chief for China, told China Daily. “Greater exchange rate flexibility is important for China as it strives to give market forces a decisive role in the economy and as it is rapidly integrated into global financial markets”