China to Inject $31.5 Billion of Liquidity Into Banking System

The reverse repo operation will be the fourth so far in July.

Headquarters of the People's Bank of China, the central bank, in Beijing, China, on Dec. 13, 2021. Andrea Verdelli/Bloomberg via Getty Images

China’s central bank will inject 226 billion yuan ($31.5 billion) of liquidity into the banking system amid headwinds in the broader economy.

The People’s Bank of China said in an online statement that the latest reverse repo operations will occur on July 15 at a fixed seven-day rate of 1.4 percent, which was lowered in May from 1.5 percent.

Reverse repo operations are a monetary policy tool consisting of borrowing cash, selling government bonds to commercial banks, and returning funds with interest.

Officials employ this measure to fuel inflation, soften liquidity pressures, or maintain control over short-term interest rates. The seven-day reverse repo rate is now China’s key interest rate.

This month, the central bank has conducted three other reverse repo operations: 98.5 billion yuan ($13.6 billion) on July 2, 57.2 billion yuan ($7.9 billion) on July 3, and 75.5 billion yuan ($10.5 billion) on July 9.

The People’s Bank of China has been pursuing a monetary policy strategy of providing a steady flow of liquidity to support financial stability. This comes at a time when the world’s second-largest economy is facing deflation risks and economic uncertainty.

In June, consumer prices fell 0.1 percent following a 0.2 percent drop in May. The headline annual inflation rate came in at 0.1 percent, the first positive reading since January.

Producer prices have also tanked this year, declining at a worse-than-expected rate of 3.6 percent year over year in June.

As for the wider economy, China’s ongoing stimulus efforts appear to be sustaining growth prospects.

The Chinese economy expanded at a better-than-expected pace of 5.4 percent year over year in the first quarter, the strongest annual growth rate in more than a year.

Upcoming figures suggest that economic conditions might have slowed in the April-to-July period amid trade tensions with the United States.

The second-quarter GDP growth rate will be released on July 15, and the consensus estimate suggests a 5.1 percent reading.

New data indicate that China’s situation has rebounded, with exports surging 5.8 percent from a year ago in June, topping the market forecast of 5 percent. The growth was driven by shipments to the European Union (7.6 percent) and Japan (6.6 percent), but exports to the United States plummeted by more than 16 percent.

Bank lending has been robust.

Chinese banks offered a larger-than-expected 2.24 trillion yuan ($312 billion) in new loans last month, up from 620 billion yuan ($86 billion) in May. Total social financing—a broad metric of credit and liquidity in the Chinese economy—also ballooned to 4.2 trillion yuan ($585 billion).

This comes two months after the People’s Bank of China reduced the reserve requirement ratio—a percentage of deposits that financial institutions are mandated to hold in reserve and not lend out—by 0.5 percentage points, injecting more than $100 billion into the financial markets. Market watchers said that this signaled a more accommodative shift in the institution’s policy stance.

These changes, says ING economist Lynn Song, are aimed at restoring confidence in the marketplace.

“Moving forward, further monetary easing will help support private sector and household credit demand on the margins, but a broader turnaround continues to hinge on restoring confidence,” Song said in a July 14 note.

In response to evolving domestic and global financial conditions, monetary policymakers have pledged to fasten their policy actions.

“The current external environment is becoming increasingly complex and severe, with weakening momentum in global economic growth, rising trade barriers, diverging economic performance among major economies,” the People’s Bank of China said in a summary of last month’s quarterly monetary policy committee meeting.

A tariff dispute with the United States has roiled China’s economy, with President Donald Trump adopting a stricter stance on Beijing over concerns surrounding the fentanyl crisis and America’s trade deficit.

While both countries continue to work on finalizing a trade deal, Trump recently announced an agreement with Vietnam that also targets China’s tariff evasion through transshipping.

With China using multiple third-party countries to avoid U.S. tariffs, experts say the White House could make transshipments an issue in trade negotiations with other regional nations, such as the Philippines, Thailand, and Laos.