Central bank offers temporary funding support to big banks

China’s central bank said it provided a “temporary liquidity facility” to some major commercial banks for 28 days to help ease a cash crunch before the Lunar New Year holiday.

The operation provides more effective liquidity transmission before the week-long break, the People’s Bank of China said in a statement Friday.

The PBOC said the new lending facility will have a funding cost for banks that’s around the same as open-market operations for a similar 28-day period, which is about 2.55 percent. That means the tool differs from cutting the ratio of deposits big banks must hold in reserve and suggests a fresh evolution of tools policy makers have been overhauling.

The measures announced Friday are helpful for banks that may not be able to provide enough collateral to use operations that require it, according to Ming Ming, head of fixed-income research at Citic Securities Co. in Beijing and a former PBOC official.

Commercial banks had 11 trillion yuan (USD1.6 trillion) of sovereign and financial bonds outstanding as of December, Ming said, and have pledged about 43 percent of those to access funding through central bank open market operations, limiting room for further such operations.

The PBOC’s statement Friday didn’t say whether the temporary funding required collateral. Should none be required, that would be unusual because most such tools involve collateral.

The PBOC has shifted toward selective tightening after a two-year easing cycle. President Xi Jinping and other policy makers decided at their annual economic conference last month China should plan prudent and neutral monetary policy this year to prevent financial risks.

“It’s too premature to conclude that there’s a change in China’s monetary policy direction,” Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong, wrote in a note. “Liquidity management and leverage control seem to be more appropriate expressions to describe the policy direction of China’s central bank.”

Cash demand surges before the annual holiday week, when hundreds of millions of people make withdrawals to travel home, put on family feasts and give relatives and friends traditional red cash gift packets. The holiday starts Jan. 27.

The central bank this week injected a record amount of funds in open-market operations, helping stop a surge in the overnight money-market rate. The main PBOC lending tool recently has been a mid-term lending facility, offering funds from three months to a year.

“It’s likely the central bank will use temporary liquidity facility as a regular tool in the future to ease liquidity shortage before quarter-end or holidays,” said Xia Le, chief economist at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. The PBOC is using a new tool because older ones offer funds at a high cost and longer duration than needed, and it’s wasteful for banks that need money for five days to have to borrow for a full year, Xia said.

Bloomberg, Reuters and Caixin reported earlier Friday that the central bank cut the ratio of deposits the nation’s five biggest lenders must hold in reserve by 1 percentage point to help ease a shortage of cash, citing people familiar with the matter. The central bank has kept the main required- reserve ratio for large banks unchanged at 17 percent for almost a year. Bloomberg