GOLDMAN SACHS: China's liquidity injection is not a sign of looser monetary policy

(Photo by China Photos/Getty Images)

China’s move to provide temporary liquidity to its largest banks ahead of the Lunar New Year holiday should not be viewed as a sign of looser monetary policy, according to Goldman Sachs, which expects the nation’s central bank to hold a “mild tightening” bias.

Media reports said the People’s Bank of China had approved a 1 percentage point reduction in the reserve ratio requirement (RRR) for the five largest banks for 28 days, which could potentially release as much as 700 billion yuan of cash, Goldman Sachs said. The PBOC on Friday in its official microblog only said it will provide temporary liquidity support for several major commercial banks for 28 days. The funding cost for the liquidity support will be about the same as the open market operations rate over the same period, it said, without giving any details.

The central bank has injected record amounts of liquidity to avert a cash crunch before the country’s biggest annual holiday, which runs from January 27 to February 2. The PBOC usually adds cash into the system at this time of the year and unwinds it after the festivities conclude. The last time it cut banks RRR was in February last year.

The move to cut the RRR “probably reflects the PBOC’s recognition of the need for large amount of liquidity and its unwillingness to send signals which could be misunderstood,” the Goldmans economists, led by Yu Song, said.

With capital outflows continuing, the central bank should have cut the RRR several times to maintain the same level of money supply and the fact it chose not to do so reflects an unwillingness to send a loosening signal, the economists said. They also cited better-than-expected fourth quarter economic data and rising inflationary pressure behind their reasoning for the tightening call.

China’s National Bureau of Statistics said on Friday the economy grew by 6.8% year-on-year in the final quarter of the year, above the 6.7% pace expected.

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