4 Jan 2022

  •  Tax payments, maturing debt and holiday cash reduce liquidity
  •  PBOC faces pressure to soothe market concerns in January

A wall of maturing debt and a surge in seasonal demand for cash will test China’s financial markets this month, putting pressure on the central bank to ensure sufficient liquidity.

Demand for liquidity may total about 4.5 trillion yuan ($708 billion) in January, 18% more than the amount seen last year, according to calculations by Bloomberg based on official data and analysts’ estimates. An increase in the amount of policy loans coming due and demand for cash to be spent during the Lunar New Year, which takes place earlier in 2022, are drivers. 

A recent reduction in the reserve-requirement ratio for banks could provide relief but some market watchers predict the central bank could ease again to avoid a liquidity crunch. That comes after policy makers indicated a shift from deleveraging the economy to supporting growth. Cash tightness adds another headache for authorities grappling with the fallout of China Evergrande Group, which has led a wave of defaults with at least six developers failing to pay debts on time in the last quarter.

“There are a number of factors that may pose threats in January to the stable liquidity conditions the central bank has vowed to maintain,” said Yishuang Li, an analyst at Cinda Securities Ltd., citing tax payments and maturity of policy loans. “The bond market is currently vulnerable after an increase of leverage in December, which means financial institutions will be more reliant on PBOC’s liquidity support.”

Further policy easing will be a double-edged sword for the People’s Bank of China. While such a move could soothe concerns about higher funding costs and prevent a liquidity squeeze, it may also fuel asset bubbles that Beijing wants to avoid.

Ahead of the Lunar New Year in 2019 and 2020, the authorities lowered the reserve ratio to pump in cash. However, they avoided supplying extra funds last year, stoking fears about a tighter policy stance and sending short-term funding costs soaring. 

On Tuesday, the PBOC reduced its injection of short-term cash to 10 billion yuan from 100 billion in the previous session. That resulted in a net liquidity drainage of 260 billion yuan, the most since early October. 

Some 1.2 trillion yuan of negotiable certificates of deposit — a form of short-term bank debt — will mature in January, along with 500 billion yuan of medium-term policy loans and another 700 billion yuan of reverse repurchase agreements, according to Bloomberg’s calculations. 

Adding to the stress, 700 billion yuan could be drained from the financial system for gifts and travel for the Lunar New Year holiday in the first week of February, according to Zhaopeng Xing, senior China strategist at Australia & New Zealand Banking Group Ltd. ANZ estimates that about 1 trillion yuan is required to meet tax obligations and banks may purchase a net 300 billion yuan of local and central government bonds issued in January.

Developer Demands

On top of that, Chinese property firms will need at least $189 billion to cover maturing onshore bonds, trust products and wages to millions of migrant workers, according to Bloomberg’s calculations and analysts’ estimates. This comes as the sector’s debt woes have shut most of it out of the offshore primary market for refinancing.

Even though most analysts foresee liquidity support, most don’t expect the PBOC to go as far as cutting the reserve ratio again or even lowering the policy interest rate. The central bank will more likely resort to using short- and medium-term tools to adjust the cash supply, according to Peiqian Liu, an economist at Natwest Group Plc. 

Bond Rally

More easing measures could give government bonds another leg up. Benchmark 10-year yields slid to the lowest in over a year in late December when the PBOC injected a net 650 billion yuan into the financial system via reverse repurchase agreements in the last two weeks of the month.

The PBOC could lower the policy rate in the first quarter to help reduce financing costs for companies, which may push 10-year yields to as low as 2.6%, according to Yewei Yang, rates strategist at Guosheng Securities Co.

“The demand for liquidity will start to pick up from mid-January,” said Ming Ming, head of fixed-income research at Citic Securities Co. “But the PBOC will use a prudent policy to ensure the supply of cash is stable.”

— With assistance by Tania Chen, Qizi Sun, Wenjin Lv, Olivia Tam, Sofia Horta e Costa, and Tian Chen