Economy

China’s Central Bank Resumes Liquidity Injections

China’s central bank took steps to ease liquidity concerns on Tuesday by injecting funds into the financial system for the first time in two weeks, alleviating worries about a potential repeat of the liquidity challenges experienced in June.

The People’s Bank of China (PBOC) infused 13 billion yuan into the markets through open market operations. Additionally, the PBOC raised the rate for its seven-day bond reverse repurchase agreements to 4.1%, up from 3.9% in August. This adjustment reflects the bank’s efforts to address monetary conditions in response to increasing capital inflows and inflationary pressures.

Since mid-October, the central bank had refrained from adding liquidity to the banking system, resulting in the benchmark seven-day repurchase rate spiking to a four-month high of 4.88% last week. The PBOC has primarily relied on open market operations as a tool for managing money supply in the interbank market since July of last year.

This liquidity injection on Tuesday mitigated fears of a tightening monetary policy in light of rising inflation, which had surged partly due to excessive liquidity that contributed to rising inflation and housing prices in September.

The financial system faced significant stress during the cash crunch in June, with interbank rates escalating sharply until the central bank intervened with targeted liquidity support.

With a Communist Party summit approaching in November, investors are increasingly optimistic that the likelihood of a credit crisis is diminishing. Expectations are growing that authorities will take steps to reduce local government debt and address risky lending practices.

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