China's New Lending Tool

By Joe Cash

BEIJING (Reuters) – China's central bank launched a new lending tool on Monday to inject more liquidity into the market and support credit flow in the banking system ahead of the expiration of trillions of yuan in loans at the end of the year.

The People's Bank of China (PBOC) stated it activated the open market outright reverse repo operations facility to "maintain a reasonable abundance of liquidity in the banking system and further enrich the central bank's policy toolbox".

Approximately 2.9 trillion yuan ($406.58 billion) in medium-term loans are due to mature between now and the end of December, making it harder for banks to finance investment and revive growth in the world’s second-largest economy.

Although the tool became effective today, the PBOC did not refer to it in Monday's open market operations statement.

In a separate announcement regarding the new facility, the PBOC mentioned that it would trade with primary dealers in Open Market Operations (OMO) on a monthly basis.

The new tool will have a tenor of less than one year, longer than the regular reverse repo operations that typically have tenors of seven, 14, or 28 days, which are conducted daily and usually require collateral.

These operations will assist the central bank in raising funds through commercial banks purchasing securities, intending to sell those same assets back in the future at a profit.

Beijing is relying on the substantial financial stimulus announced in September to boost lending and investment as a significant property market downturn and weak consumer confidence impact investor confidence.

The PBOC, which has been consistently reducing interest rates and injecting liquidity, faces pressure to take further action to ensure the economy meets the government's target growth of around 5% this year.

State-owned Shanghai Securities News reported shortly after the PBOC notice that the new tool would cover three- and six-month tenors and assist liquidity adjustments over the coming year, citing sources close to the central bank.

The article asserted that the central bank's timing for launching this tool is expected to be a better hedge against the concentrated expiry of the medium-term lending facility before the year's end.

($1 = 7.1326 Chinese yuan)