China:The PBOC provides temporary liquidity injection for large commercial banks;not an easing signal in our view

Media reported the PBOC has approved a 100 bps RRR cut for the big 5 commercialbanks for 28 days or to an unspecified date yet to be decided. If accurate, such amove would release between Rmb600-700 bn of liquidity.

The PBOC Weibo (a Chinese social media application) subsequently confirmed itprovided a Temporary Liquidity Facility to several large commercial banks which havea higher willingness to on-lend to other interbank financial institutions ahead of theChinese New Year (28th January). The cost is roughly equivalent to OMOs of thesame duration (28 days).

As the PBOC did not give further information we do not believe a reliable size ofimpact can be estimated based on publicly available information. The costinformation given by the PBOC implies this was not a RRR cut but a new form ofliquidity supply.

In our view, this move should not be viewed as a signal of looser monetary policy,and indeed the PBOC appears to have released the official statement in response tothe media reports. If so, it probably reflects the PBOC’s recognition of the need forlarge amount of liquidity and its unwillingness to send signals which could bemisunderstood. Indeed, with large FX outflows continuing, in theory the PBOCshould have cut RRR a number of times even to just maintain a neutral level ofliquidity supply. The fact that it chose not to do so almost certainly, in our view,reflects an unwillingness to be seen as sending loosening signals. With today’s 4QGDP data above expectations and inflationary pressures rising, we think monetarypolicy is likely to maintain its mild tightening bias going forward.