China's Central Bank Intensifies Liquidity Measures at Year-End

In December, the Chinese central bank launched a significant liquidity offensive, injecting 1.7 trillion yuan into the financial system. This measure not only serves to stabilize the economy but also to support the financial markets at the year's end. The core of the program consists of direct repurchase agreements amounting to 1.4 trillion yuan, executed with contracts spanning three and six months. The People's Bank of China (PBOC) aims to ensure a stable flow of liquidity in the banking system with these measures. This offensive follows previous interventions in which 800 billion and 500 billion yuan were injected into the market over the past two months. Additionally, in December, the central bank acquired government bonds with a net value of 300 billion yuan. This transaction further increases the cash supply in the financial markets, following regular purchases of government bonds by the PBOC since August. The measures are part of a broader overhaul of liquidity management in China, aiming to align more closely with global standards. A significant shift was the phasing out of the one-year medium-term lending facility, in favor of focusing on short-term interest rates as the main control instrument. These changes come amid speculation of an even looser monetary policy, leading to a decline in government bond yields. Experts anticipate that the PBOC will continue to rely on direct repurchase agreements and the acquisition of government bonds, given the economic challenges posed by U.S. tariffs and ongoing deflationary pressure. China's top policymakers signaled at a key meeting to keep liquidity ample, indicating a more supportive approach from the government.