China’s central bank injects $31 billion to ease domestic liquidity as trade war looms in the horizon

The unexpected move was explained to be part of a package of measures to counteract a potential fallout from the trade conflict.

On Tuesday, China’s central bank, the People’s Bank of China (PBOC), lent $31 billion (200 billion) to financial institutions via its medium-term lending facility (MLF). The move underscores investor concerns that the looming trade war between the U.S. and China is likely to act as a drag against China’s economy and impact the country’s liquidity.

China’s injection of funds into its economy comes hours before the announcement of U.S. President Donald Trump that he could impose 10% tariffs on Chinese goods exports to the U.S. worth $200 billion.

Significantly, no MLF loans were maturing on Tuesday, whereas recent operations had come on days when MLFs were due to mature.

The unexpected move by China’s PBOC comes in the wake of its decision last week, wherein it chose to leave borrowing costs for interbank loans untouched following the U.S. Federal Reserve raising its policy rate. Analysts had expected the PBOC to mirror the Fed move and increase interest rates marginally, as it has tended to do, in order to keep the spread between Chinese and U.S. yields stable.

According to Tommy Xie, Head of Greater China research at OCBC Bank, the MLF injection was probably “part of the package” of measures to counteract the potential fallout from the trade conflict.

“With the stakes for trade war to increase to $200 billion, there is no way for China to match. But at least, it has signaled clearly that China will not give up its bottom line to support its own high-tech industries,” said Xie. “Instead of becoming trapped in this tit-for-tat vicious cycle, we expect China to expedite its plan to boost its domestic demand via proactive fiscal policies to cut tax and increase expenses.”

He went on to add, the central bank could further stimulate the country’s economy, against a backdrop of rising credit default risks, looming trade war and a slowdown in growth.

As per a statement by the PBOC, the cash injection was to “make up for mid- to long-term liquidity gap in the banking system” to counter factors which include issuance of government bonds, tax payments, and maturing reverse repos.

According to David Qu, market economist at ANZ Bank in Shanghai, its very likely that the PBOC was feeling some pressure on the liquidity front due to an increase in corporate financing costs, credit defaults and suspended bond issuance.

“The central bank is responding to those pressures,” said Qu. “The MLF issuance today could also be aimed at easing the concerns financial markets had over the Sino-U.S. trade war.”

In its statement on Tuesday, the PBOC also mentioned that it had injected another 100 billion yuan through reverse repos.

Incidentally, reverse repos worth 50 billion yuan is set to expire on the same day.

On June 6, the PBOC had injected funds worth 463 billion yuan through MLF to financial institutions as MLF loans worth 259.5 billion yuan were set to mature.

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