On Saturday evening, in the course of previewing what most expect will be a messy (and that’s something of a euphemism in this case) open for mainland markets in China coming off an extended holiday, I mentioned a veritable wall of maturing central bank funding.
Thanks to the necessity of adding some 600 billion yuan in funding that would have matured Friday to Monday’s maturities, the PBoC will need to decide how much to roll out of a total 1.05 trillion that matures on February 3.
That is easily the biggest one-day maturity wall ever. Here’s what it looks like:
As it turns out, they’re going to roll all of that – and then some.
The PBoC said Sunday it will inject around 1.2 trillion yuan Monday. That will mark the biggest ever one-day injection dating back more than 16 years.
Here is the statement posted to the PBoC’s website (which, we would add, has been updated with a snazzy, modern design):
PBC to inject RMB1.2 trillion through open market operations on February 3, 2020
To maintain reasonable and adequate liquidity in the banking system and sound operation of the money market during the period of epidemic prevention and control, the People’s Bank of China will conduct reverse repo operations in the amount of RMB1.2 trillion on February 3, 2020 to ensure ample liquidity supply. The liquidity in the whole banking system is RMB900 billion more than that of the same period of last year.
There are a couple of things to note. First, they didn’t say what instruments they plan to use, and they didn’t indicate the rates. As noted on Saturday evening, an early OMO cut would probably help sentiment quite a bit. Slashing the MLF rate would pave the way for a lower loan prime rate later this month, when the first signs of the virus’s impact on the economy should start to become apparent.
Nomura’s chief China economist Ting Lu said last week the new virus could hit the Chinese economy harder than SARS and expects monetary policy easing and stimulus interventions “to be unveiled in coming days”.
“We expect Beijing to introduce a raft of measures to provide liquidity and credit support to the economy, especially those business owners severely hit by the pandemic”, he says, adding that “RRR cuts, rate cuts, various lending facilities, and open market operations all are possible options” as are “targeted credit-easing measures to help corporates and households that are likely to suffer more from the virus outbreak”.
To be sure, China has room to cut.
It’s hard to perceive given the scale, but MLF and the 7-day reverse repo rate were cut in November (here and here). There’s considerable scope for more easing across all policy and pseudo-policy rates.
The second (and crucial) observation is that the net amount of liquidity set to be injected isn’t all that large. With more than 1 trillion maturing, the amount above and beyond the roll will be just 150 billion yuan. That’s hardly a tidal wave.
Clearly, the PBoC is angling to ensure they can keep injecting funds over the course of the week (and month) in the event sentiment deteriorates and funding markets tighten as the virus headlines get worse. Remember, the loan prime rate is set off MLF. If the PBoC intends to guide this month’s LPR print (on the 20th) lower, they’ll likely cut the MLF rate sometime soon.
Meanwhile, China has shut night sessions for futures trading starting Monday “until further notice” citing “difficulties including staffing and system maintenance” at trading firms.
Additionally, the CSRC will permit the rolling of some share pledge contracts up to six months. You’ll recall that pledged-stock deals (basically a margin call trap) have been a “problem” during previous bouts of volatility on the mainland.
Finally, just to underscore the point, this is what mainland markets are up against: