China injects cash into the banking system

After the markets went down dramatically yesterday in the wake of the Evergrande default, China injected $26 billion into the repo markets to try to resolve the liquidity problem. This was not a bailout of Evergrande, but a way of supporting the markets in view of Evergrande’s default.

The repo market is about banks lending to each other when a bank needs cash to meet government reserve requirements after each business day. Banks that need cash normally get loans from other banks that have extra cash. The interest rates on such loans go up or down, depending on the state of the market.

In 2008, about 6 weeks before Lehman Brothers collapsed, banks refused to lend them money in the repo market. Lehman had many mortgage-backed securities to use as collateral, but bankers began to recognize that these were largely worthless. So they would not accept them as collateral.

Lehman collapsed in 6 weeks.

Two years ago (September 11, 2019) the US repo market began to freeze up again. The Fed stepped in to take up the slack. Banks who could not get loans from other banks were able to get loans from the Fed itself. It started out fairly small with only about $30 billion being injected into the banking system. Today it is well over a trillion dollars.

So the fact that the markets are fairly stable does not mean that all is well. Essentially, the banking system has been on life support from the Fed for the past two years.

China’s Repo Market

China also has a repo market. Its central bank (PBOC) has been injecting cash for a long time, but about August 22, 2021 it increased the daily injection by 500 percent from the normal $10 billion to $50 billion. The bank then announced that it would inject still another $70 billion at the end of the same week in August.

This underscored the magnitude of China’s financial problem.

https://www.reuters.com/world/china/china-cbank-increases-cash-injections-soothe-tightening-worries-2021-08-25/

SHANGHAI, Aug 25 (Reuters) - China's central bank increased short-term fund injections into the financial system on Wednesday, in a bid to soothe market worries over tightening liquidity…

On Wednesday, the People's Bank of China (PBOC) said it offered 50 billion yuan ($7.72 billion) through seven-day reverse repos into the banking system, whereas it mostly only injected 10 billion yuan each day during the month.

In a separate statement posted on late Tuesday, the PBOC said it would auction another 70 billion yuan worth of one-month cash deposits on Friday…

Issuance in August has so far risen to about 860 billion yuan, according to Reuters calculations based on official statistics, more than 30% above July's total issuance and not far from this year's high of 875.3 billion yuan in May.

Today's Action in China

This central bank’s action toward the end of August seemed to stabilize the markets, so they went back to injecting the “normal” amount of $10 billion per day. But now, a month later, China found it necessary to take action again to stabilize the markets (without actually bailing out Evergrande). Today it injected another $26 billion into the system.

https://www.bloomberg.com/news/articles/2021-09-17/china-boosts-cash-addition-to-soothe-nerves-amid-evergrande-saga

China injected more cash into its banking system in a sign authorities are seeking to avert a funding squeeze amid a seasonal rise in financing demand and the intensifying debt crisis at China Evergrande.

The People’s Bank of China added 90 billion yuan ($14 billion) of funds on a net basis through seven-day and 14-day reverse repurchase agreements on Friday, the most since February. Today was the first time this month it added more than 10 billion yuan short-term liquidity into the banking system on a single day. 

The move comes as the trouble facing China Evergrande Group fuels investor concern over the health of real estate and credit markets. Adding to the stress is a seasonal spike in demand for cash as banks are hesitant to lend toward the end of the quarter ahead of regulatory checks. Liquidity also tends to diminish at this time of year ahead of a one-week holiday at the start of October.

“Avoiding a systemic liquidity squeeze is the absolute priority for the PBOC and it has means to do so,” Societe Generale SA economists led by Wei Yao wrote in a research note.  “A Lehman-style financial-market meltdown is not our top concern, but an extended and severe economic slowdown seems more probable…” 

On Friday, the central bank injected 50 billion yuan through its seven-day reverse repos, and another 50 billion yuan [$7 billion] via 14-day contracts, which haven’t been used since February. Some 10 billion yuan came due Friday…

Numerous industries could be exposed to credit risks if Evergrande was to default, Fitch Ratings warned. It said smaller banks and vulnerable developers would be hurt the most. With more than $300 billion in liabilities, Evergrande’s liquidity stress is stoking worries over the broader Chinese property industry. Both Morgan Stanley and Goldman Sachs slashed forecasts for the industry citing the potential of an Evergrande default to roil its suppliers, other developers and financial markets.

So while some of the media tried to tell everyone that China’s problem was solved and everyone should relax and go about their business as usual, the situation is anything but business as usual. The problem cannot be solved by creating more money. They can only postpone the problem to a later date while the CCP government goes further into debt.

We should expect China’s central bank to delay the inevitable. The Fed has done the same here in America for the past two years by purchasing $125 billion/month of worthless bonds so that banks won’t go bankrupt. This system is mortal and cannot last forever.