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This move is because the troubles facing China Evergrande Group have exacerbated investors’ concerns about the health of the real estate and credit markets.
China has injected more cash into the banking system, which shows that the authorities are seeking to avoid funding strains amid the seasonal increase in financing demand and the intensification of China’s Evergrande debt crisis.
On Friday, the People’s Bank of China added RMB 90 billion (US$14 billion) in funds through 7-day and 14-day reverse repurchase agreements, the highest level since February. Today is the first time this month that short-term liquidity has been added to the banking system by more than 10 billion yuan in a single day.
This move is because the troubles facing China Evergrande Group have exacerbated investors’ concerns about the health of the real estate and credit markets. Adding pressure is the seasonal surge in demand for cash, as banks are hesitant to lend at the end of the quarter before regulatory inspections. At this time before the one-week holiday in early October each year, liquidity also tends to decrease.
“Avoiding a systemic liquidity crunch is an absolute priority for the People’s Bank of China, and it has ways to do so,” wrote an economist at Societe Generale, led by Wei Yao, in a research report. “Lehman-style financial market collapse is not our biggest concern, but a severe long-term economic slowdown seems more likely.”
Nevertheless, the operation of the People’s Bank of China has not yet pushed down money market interest rates. The 7-day repo rate, which is an indicator of the cost of interbank lending, rose 14 basis points to 2.4% on Friday, the highest level since June 30.
The anxiety about Evergrande comes at a time when China’s economy has slowed down. Strict action controls implemented to contain the Covid-19 outbreak have harmed retail spending and travel, while measures to reduce real estate prices have also caused losses. On Wednesday, the country reported that retail sales slowed more than expected in August, and the growth of industrial production and fixed asset investment slowed.
The People’s Bank of China is seeking to strike a balance between stimulating the economy and ensuring that its cash injection does not lead to asset bubbles. Since July, as the policy loan matures, it has not added additional medium-term liquidity.
On Friday, the central bank injected 50 billion yuan through a 7-day reverse repo, and another 50 billion yuan through a 14-day contract, which has not been used since February. About 10 billion yuan will expire on Friday.
Alvin Tan, head of Asian foreign exchange strategy at Royal Bank, said: “It can be said that the situation of Evergrande and its impact on the broader real estate market will have a direct impact on China’s economic growth far greater than any other regulatory crackdowns.” Canada is in Hong Kong. “The People’s Bank of China is taking action to contain the influence of the currency market, and I won’t be surprised.”
Evergrande’s uncertainty has prompted Chinese observers to consider the worst possible scenario when considering how much suffering the Communist Party is willing to endure. As the signs of financial contagion increase, the pressure to intervene is increasing.
Fitch Ratings warned that if Evergrande defaults, many industries may face credit risk. It said that smaller banks and vulnerable developers will suffer the most. With debts exceeding US$300 billion, Evergrande’s liquidity pressure has triggered concerns about the broader Chinese real estate industry. Both Morgan Stanley and Goldman Sachs lowered their forecasts for the industry on the grounds that Evergrande’s default may disrupt its suppliers, other developers and financial markets.
Much depends on how much the real world affects the wider real estate industry, and the real estate industry is the key to China’s economy. As the company failed to complete the promised construction work and is facing repayment of wealth management products sold to individuals, the risk that consumers may further reduce expenses is increasing.
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