China Pumps Loads of Cash into its Economy

China has been pumping a lot of cash into its system to lift market sentiment, as the second-largest economy in the world walks in a thin line between curbing debt and keeping everything running smoothly.

China injected a lot of money to its economy.

Last week, the People’s Bank of China added a total cash of 810 billion Chinese yuan, or $122.4 billion, in five straight days of daily liquidity management operations.

According to experts, those actions, which represented the biggest weekly net increase since January, were part of Beijing's response to its 10-year sovereign bond yields spiking to multiyear highs.

“Surging Chinese government bond yields hit the nerve of policymakers, so in order to further prevent a greater surge, they injected liquidity into the system to improve market sentiment,” said Ken Cheung, a foreign exchange strategist.

The bound rout was due to terrors of regulatory tightening from Beijing, an analyst said. Bond yields, which move contrariwise to prices, temporarily hit 4 percent in China for the first time in three years.

A growth in the benchmark’s government bond yield threatens to drive up overall borrowing costs, which can possibly worsen the country’s debt situation.

This week, the PBOC added a net of 30 billion yuan or $4.5 billion, but it did not expand that money supply on Wednesday. According to some analysts, the pause may have been due to market sentiment seemingly stabilizing, but it may be short-lived.

As the 10-year yields of Chinese are still near the psychologically important 4 percent level, Cheung said that he expects more injections ahead if necessary, as Beijing needs to maintain its liquidity to please the market.

The PBOC’s daily cash injections were done through the issuance of reverse repurchase agreements, or reverse repos. It’s a process by which the central bank purchases securities from commercial banks with an agreement to sell them back in the near future for a higher price.

Beijing officials have been frank recently about financial risks in the country, which is plagued by a high level of debt, and investors are concerned about a domino credit event unfolding.

That being the situation, it makes sense for the central bank to want to avoid overheating the economy with too much money.

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