China Unexpectedly Drains Cash as Leverage Builds in Bonds
Comment of the Day

January 15 2021

Commentary by Eoin Treacy

China Unexpectedly Drains Cash as Leverage Builds in Bonds

This article for Bloomberg may be of interest to subscribers. Here is a section:

China’s central bank withdrew cash from the financial system for the first time in six months, after excess liquidity had pushed an interbank borrowing cost to an all-time low. The People’s Bank of China offered just 500 billion yuan ($77 billion) of medium-term loans to lenders on Friday, resulting in a net drainage of 40.5 billion yuan for January. Analysts had predicted a net injection of 230

The move signals that the PBOC’s monetary easing of the past two months may be ending. While the policy has helped repair sentiment in China’s credit and government bond markets, injecting too much cash risks further stoking leverage in the financial system.

“The injection is much less than consensus,” said Xing Zhaopeng, an economist at Australia & New Zealand Banking Group. “This means that the era of super-loose cash supply will end, and liquidity conditions will not be as favorable as previous years.”

Eoin Treacy's view

China’s economy rebounded quicker than most others because it successfully contained the spread and demand for the products it exports surged to new highs.

The reality is that China became the workshop of the world because it was willing to subject its population to privation and pay little heed to environmental concerns. That went into overdrive during the lockdowns when whole workforces were quarantined at factories to ensure production remained on track.

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