China pumping billions into system to soften Evergrande blow

Highlights

  • The Chinese central bank pumped US$71 billion into system last week.
  • The central bank has conducted OMOs four times in the last five days.
  • The cash injection is aimed at averting Evergrande fallout.

The Chinese central bank – People’s Bank of China – has been pumping lot of cash into the system, as property developer China Evergrande’s default looms large on the world’s second largest economy.

According to data compiled by Kalkine from People’s Bank of China, the apex bank has injected CNY460 billion (about US$71 billion) into the system since Wednesday last week – a day prior to Evergrande’s US$83 million couple payment due date.

The central bank has injected the money in six tranches of the open market operation (OMOs) spread across four days. Of these, two are reverse repo operations with a combined worth of CNY120 billion and have a maturity period of seven days – at an interest rate of 2.2%.

China pumping billions to soften Evergrande blow

The remaining four are the reverse repo operations worth CNY340 billion cumulatively, with a maturity period of 14 days and an interest rate of 2.35%.

The reverse repo is the purchase of securities with an agreement to sell them at a higher price at a specific future date. For the party selling the security (and agreeing to repurchase it in the future) it is a repurchase agreement (RP) or repo; for the party on the other end of the transaction (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement (RRP) or reverse repo.

The move by the Chinese central bank is helping to ensure sufficient liquidity throughout the Evergrande crisis. It is also helping to meet extra demand for funds ahead of China’s week-long holiday at the start of October. As a result of this, the cost of borrowing overnight fell to 1.68% -- its lowest level since late July, down from 2.28% last week.

With over US$300 billion in debt – 2.1% of China’s gross domestic product (GDP) –Evergrande’s collapse would be enough to send the world’s second largest economy into a tailspin and cause a severe liquidity crunch.

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