PBOC's quiet liquidity injection

The Chinese central bank was trying to avoid moves suggestive of general easing as it confirmed pumping liquidity into banks on Thursday.

After weeks of media reports, China's central bank confirmed in its monetary policy report for the third quarter that it injected 769.5 billion yuan (126.15 billion U.S. dollars) of liquidity into commercial banks in September and October using a new method.

The medium-term lending facility (MLF) is the latest money supply tool for the People's Bank of China (PBOC), providing liquidity to a set of banks using treasury bonds, central bank bills, policy bank bonds and high quality corporate bonds as collaterals.

The PBOC disclosed that it injected 500 billion yuan in September and 269.5 billion yuan in October, at an interest rate of 3.5 percent with three-month maturity.

The PBOC also confirmed that it had provided funding support to policy banks, mainly the China Development Bank, for projects such as shanty town renovation through pledged supplementary lending (PSL), and had guided PSL rate lower in September. However, the central bank did not specify the size of PSL or the interest rate.

These measures, according to the report, have offset a shrinking foreign exchange inflow and kept base money growth stable.

ANYTHING BUT RRR CUT

It is clear from the PBOC's liquidity operations in the past year that the central bank is ready to be innovative with liquidity instruments to avoid resorting to general cuts of reserve requirement ratio (RRR) for banks.

"We think an important reason could be that RRR cuts could easily be misunderstood to be tools of general easing, which the government wants to avoid," said Wang Tao, chief China economist with UBS, in a research note.

"The PBOC will continue to use other liquidity management tools. Of course, if China experiences persistent large net foreign exchange outflows, the chance of general RRR cuts will increase significantly," Wang said.

The liquidity injection is expected to boost the real economy by lowering lending rates and cutting costs for enterprises in fundraising, according to the report.

As China's growth is predicted to slow further due to ongoing property adjustment and inflation will decline as a result of lower commodity prices and excess capacity, corporate cash flow will be hampered by weaker revenue growth and rising real cost of debt services, Wang said.

China is set to release its October indicators in the coming week, starting with trade data on Saturday.

China's exports rose 11.6 percent year on year to 206.87 billion U.S. dollars in October. The growth rate has decelerated compared to September's 15.3 percent, the fastest growth rate in 19 months.