The Chinese banking industry is facing severe liquidity pressure. In response to the challenges, the People’s Bank of China (PBOC) has recently implemented a series of measures to support bank capital stability, including conducting 235.1 billion yuan of 7-day reverse repurchase operations and cutting the interest rate by 0.1%, as well as 200 billion yuan of Medium-term Lending Facility (MLF) operations.
Background:
With a 300 trillion yuan debt bomb, how long can the prosperity brought by local government spending last?
The Chinese financial industry is experiencing a shortage of liquidity.
China’s economy showed a continued trend of slowing growth in the first half of 2024, with a growth rate of 4.7% in the second quarter, lower than the expected 5.1%. Despite the first-half GDP growth of 5.0%, the economic outlook remains uncertain due to challenges such as a real estate market collapse and reduced consumer spending.
Experts have expressed skepticism about the effectiveness of the reform measures proposed by the Chinese government and are concerned that the domestic and external environment may further impact economic growth.
According to a report from the Economic Daily today, the People’s Bank of China (PBOC), the central bank of China, has announced several operations to release funds in order to ensure sufficient liquidity in the banking system by the end of the month.
First, they conducted a 235.1 billion yuan 7-day reverse repurchase operation, lowering the interest rate from 1.8% to 1.7%. This adjustment not only marked the first interest rate cut under the new policy rate system but also changed the 7-day reverse repurchase operations to fixed-rate and quantity bidding to more effectively control market rates. This means that banks can borrow money from the central bank at a lower rate for a term of 7 days.
On the same day, the Loan Prime Rate (LPR) and the Standing Lending Facility (SLF) rates were both cut by 0.1%.
In addition, the PBOC conducted a 200 billion yuan one-year Medium-term Lending Facility (MLF) operation, which involves longer-term borrowing, with the interest rate reduced from 2.5% to 2.3%, a decrease of 20 basis points. These measures combined, the PBOC actually injected a net of 386.1 billion yuan into the market in a single day (235.1 billion + 200 billion – 49 billion from the reverse repurchase expiring on the 25th).
The MLF is a monetary policy tool launched by the PBOC in September 2014 to provide medium-term basic currency support. This tool mainly serves financial institutions that meet macro-prudential management requirements, such as commercial banks and policy banks. MLF operations are conducted through bidding, with financial institutions required to provide high-quality bonds such as government bonds or central bank bills as collateral, with funds provided by the central bank to adjust the medium-term financing costs of financial institutions and support the provision of low-cost loans, aiming at “indirectly” reducing the societal financing cost.
Furthermore, in order to enhance the liquidity of bank perpetual bonds, which are used to supplement capital, the PBOC conducted a 5 billion yuan Central Bank Bills Swap (CBS) operation, allowing banks to exchange the bills they hold for cash with a term of 3 months, using fixed-rate quantity bidding for primary market dealers, with a very low rate of only 0.1%.
Overall, these measures are taken by the PBOC to ensure sufficient liquidity in the banking system and support bank capital stability. Whether reducing bank borrowing rates and providing liquidity support can “indirectly” stimulate economic activity in China remains to be seen with time.
Currently, the Chinese banking industry is facing serious liquidity pressure. Various factors contribute to these issues, including the continued impact of unfinished real estate projects, commonly known as “unfinished buildings,” leaving banks with a large amount of non-performing loans, further complicating fund withdrawal.
In response to this crisis, the Chinese financial industry has recently introduced regulations such as salary caps, salary reductions, and salary refunds, including setting a maximum annual salary limit of 3 million yuan for state-owned financial institutions and recovering bonuses and salaries already paid out, with a cumulative recovery amount of nearly 100 million yuan (approximately 452 million New Taiwan dollars).
Against this backdrop, the PBOC’s latest policy aims to alleviate the liquidity tightness in the financial system to stabilize the financial market and support economic operations.
Related Reports:
– The “salary refund wave” in China has spread to public fund employees, who are required to return high salary excesses to respond to common prosperity.
– To save local fiscal black holes, China issued its first 50-year ultra-long special national debt with a total scale of 1 trillion yuan.
– Criticism of China’s ban on Bitcoin mining “makes the United States laugh,” says vice president of Hong Kong University of Science and Technology: Hong Kong’s web3 needs to reform bureaucracy.
