China curbs liquidity ahead of Lunar New Year

China's central bank

China has withdrawn 320 billion yuan ($49.5 billion) from financial markets in about two weeks, as authorities focus on removing excess liquidity to tame soaring house prices and activities.

It is a rather rare move for China to curb liquidity ahead of the Lunar New Year holiday as it could hinder the country’s economic recovery from the coronavirus-induced slump, with effects spilling into overseas markets as well.

Though the People’s Bank of China said Friday it would inject 100 billion yuan into the markets ahead of the holiday, another 100 billion yuan worth of operations matured that day, resulting in no net change to liquidity. The two-week interbank lending rate remains relatively high at almost 3%.

China’s central bank usually adds large sums to the banking system before Lunar New Year so banks can meet rise in demand for cash during peak spending season. 

 The bank had injected 600 billion yuan into the markets by a week out in 2020, and 500 billion yuan in 2019.

As authorities urge residents not to make “unnecessary” trips to their hometowns for the Lunar New Year holiday, less demand for cash than usual is possible.

However, Founder Securities analyst said PBOC’s real motive for decreasing liquidity is to prevent an excessive rise in property and stock prices and to lower credit risks in the future. Property developer China Vanke reported a 30% jump in home sales in the year for January to 7.14 billion yuan. 

China injected troves of cash into the market last year to carry its economy through the pandemic. But the increased liquidity has boosted asset prices recently. The Shanghai Composite Index topped 3,600 last month, at one point gaining as much as 36% from its low in March 2020.

China has tightened restrictions on property sales in over 30 cities since summer to prevent a property bubble, including cap on the number of homes a family can buy. Banks also are implementing a longer screening process and caps on mortgages, in line with official guidance.

Damon Harrison
Market Analyst, IPG Group