PBOC Liquidity Operation to Offer Clues to China’s Cash Squeeze

(Bloomberg) -- As jitters grow about tighter cash supply in China, investors may get a glimpse of the central bank’s stance on liquidity conditions on Thursday.

The People’s Bank of China’s cash injection will be watched as a signal of whether policy makers are ready to supply fresh liquidity, with commercial lenders due to repay 100 billion yuan ($15.3 billion) in one-year policy loans on Thursday. Another 56.1 billion yuan offered via a targeted lending tool will mature on April 25.

The authorities will probably loosen the grip on cash supply by just enough at a time when banks are expected to help corporate clients pay taxes and sales of government bonds are forecast to accelerate, according to analysts. A liquidity pledge by Sun Guofeng, head of the PBOC’s monetary policy department, this week may provide a clue on the central bank’s stance.

Investors are trying to determine if policy makers are shifting toward a tightening bias after the PBOC withdrew a net 40.5 billion yuan of one-year funds from the financial system in the first quarter to stem a rise in leverage. Liquidity worries have ricocheted through China’s markets, with the main equities gauge falling from the highest in over a decade and the benchmark money market rate soaring to a three-year peak in February.

“We do expect the central bank to step in and soothe nerves by injecting liquidity into the financial system with open-market operations and medium-term lending facility,” said Becky Liu, head of China macro strategy at Standard Chartered Plc. However, “it will not do too much as it still expects to stabilize macro leverage and limit credit growth.”

READ: China Tests Banks With the Longest Cash Drought in 10 Months (2)

To be sure, banks aren’t suffering from a severe shortage in cash for now. The seven-day repurchase rate -- a gauge of interbank funding costs -- is below its average level for the past year, and the 10-year sovereign bond yield is at the lowest level in over two months.

Here’s a look at brokerages’ forecasts on PBOC’s medium-term loan operation this month:

• Standard Chartered Plc: gross injection of 200 billion yuan to 250 billion yuan
• ANZ Banking Group: gross injection of 300 billion yuan
• Huachuang Securities Co.: gross injection of 150 billion yuan to 200 billion yuan
• Citic Securities Co.: neutral position
• Industrial Securities Co.: neutral position

Given the PBOC typically conducts such operations around the middle of every month, it may choose to roll over -- or not -- all the loans due in April at one go on Thursday.

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