China turns on liquidity tap to ease cash squeeze

1. China Turns on Liquidity Tap
to Ease Cash Squeeze

2. Contd…
China's central bank is putting its money where its mouth is. Having spent years outlining
the move toward a price-based monetary framework and away from directly channeling
credit, the People's Bank of China is turning to market-based liquidity measures to ease a
pre-Chinese New Year cash squeeze and offset capital outflows stemming from its support
for the falling yuan. Net injections totaling more than 1 trillion yuan ($152 billion) since
mid-January add about the same as a 1 percentage point cut to banks' required reserve
ratios -the traditional way to boost liquidity. The difference: RRR cuts are lasting, while
injections via reverse repurchase agreements and new lending tools have set time periods.
That gives the PBOC more power to manage liquidity by choosing whether or not to roll
over funds as they come due.
The newer liquidity tools also carry varying interest rates depending on the time period
attached, helping create a yield curve the market can use for pricing other securities.
That's important for a central bank balancing the need to avoid a short-term cash crunch
with longer-term plans to rein in the pace of debt expansion.
Greater transparency is forming around the new approach too, with PBOC researcher Ma
Jun explaining the moves to Chinese media.

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