China turns on liquidity tap to ease cash squeeze

BEIJING: China’s central bank is putting its money where its mouth is. Having spent years outlining the move toward a price-based monetary framework and away from directly channeling credit, the People’s Bank of China is turning to market-based liquidity measures to ease a pre-Chinese New Year cash squeeze and offset capital outflows stemming from its support for the falling yuan. Net injections totaling more than 1 trillion yuan ($152 billion) since mid-January add about the same as a 1 percentage point cut to banks’ required reserve ratios -- the traditional way to boost liquidity.

The difference: RRR cuts are lasting, while injections via reverse repurchase agreements and new lending tools have set time periods. That gives the PBOC more power to manage liquidity by choosing whether or not to roll over funds as they come due.

The newer liquidity tools also carry varying interest rates depending on the time period attached, helping create a yield curve the market can use for pricing other securities.

China has no intention to devalue the yuan: China’s vice president underlined the Communist leadership’s pledge to avoid pursuing a policy of devaluation of the yuan, after criticism that his nation’s policy makers haven’t been clear on their intentions with the exchange rate.