China's central bank pumps in $25 billion to boost liquidity

BEIJING: China's central bank has injected a whopping 163 billion yuan into 20 financial institutions to ease liquidity strain in the world's second largest economy, currently witnessing sluggish growth.

The People's Bank of China on Friday pumped 163 billion yuan (about $25 billion) into the financial system in open market operations via medium-term lending facility ( MLF), the official Xinhua news agency reported today.

The MLF is a liquidity tool the PBOC introduced in 2014 to help commercial and policy banks maintain liquidity by allowing them to borrow from the central bank by using securities as collateral.

The fresh funds were injected into 20 financial institutions, according to the PBOC. MLF worth 110 billion yuan had been due on the same day, the report said.

Among the new funds, 47.5 billion yuan is for 3 months, 62 billion yuan for 6 months, and 53.5 billion yuan for one year, at interest rates of 2.75 per cent, 2.85 per cent and three per cent, respectively.

China's economy grew 6.9 per cent in 2015, the slowest since 1990, and capital has been flowing out of the country due to worries over flagging growth, causing the yuan to weaken. China's foreign exchange reserves also dropped $99.5 billion to $3.2 trillion in January.

The efforts of the PBOC to manage market liquidity after the Lunar New Year holiday will help ensure smooth liquidity conditions, allowing financial markets to function without disruption, according to an industry report.

Lowering MLF interest rates and showing a willingness to offer liquidity indicate the PBOC's intention to prevent interest rate spikes and keep the monetary stance relatively accommodative, said China International Capital Corporation (CICC) in a report.

The moves are also part of the reform to establish a market-based interest rate system, it said.

CICC also suggested that a supportive monetary policy was needed as growth stabilisation becomes China's top priority.

On February six, the PBOC had injected another 110 billion yuan ($16.7 billion) into the financial system through open market operations to ease liquidity strain ahead of the Spring Festival holidays from February seven.

The PBOC made the injection through reverse repurchase agreements (repo), in which central banks buy securities from banks with agreements to resell them in the future.

The move brought the total amount of funds pumped into the market through such operations this week to 620 billion yuan, following a net injection of 690 billion yuan in late January.

The bank has conducted reverse repos for eight workdays in a row as a cash crunch is usually expected before the Spring Festival holiday week.