China just boosted bank liquidity by 843%, adding further pressure on the yuan as the currency suffers its weakest year in almost 3 decades

Party and state leaders Xi Jinping, Li Keqiang, Wang Huning and Han Zheng meet with representatives of model civil servants who are in Beijing to attend a national award ceremony at the Great Hall of the People in Beijing, capital of China, Aug. 30, 2022.
China's Xi Jinping.Li Xueren/Xinhua via Getty Images
  • This week, the People's Bank of China injected 868 billion yuan ($122 billion) into its banking system compared to 92 billion yuan the prior week.

  • The Golden Week holiday next week and Communist Party events are likely reasons for the massive cash influx.

  • But the liquidity boost adds more pressure on the yuan, which is on track for its worst annual performance since 1994.

The People's Bank of China provided a massive liquidity boost to the financial sector this week ahead of key national events.

The central bank injected a net 868 billion yuan ($122 billion) into its banking system, compared to 92 billion yuan the prior week. That's the most since January 2019 and marks an 843% weekly increase.

This week's daily injections ranged from 133 billion yuan to 198 billion yuan, up from 12 billion yuan to 24 billion yuan a week ago, according to Bloomberg.

China often takes steps to ensure there is enough liquidity during major holidays, with Golden Week starting this weekend. This week's outsized cash injection also coincides with twice-a-decade leadership summit next month.

But flooding the banking system with extra cash adds downward pressure on the yuan, which is on pace for its worst annual performance since 1994. On Friday, the yuan slipped 0.12% against the dollar to hit 7.1161 and has shed more than 11% so far this year.

Earlier this week, the offshore unit depreciated to its lowest point ever against the greenback, and its domestic counterpart dropped to its weakest level since the 2008 financial crisis

So far, the People's Bank of China has refrained from raising benchmark rates, but instead has eased them to stimulate growth in an economy plagued by COVID-19 lockdowns, a property crisis, and supply chain issues. It has, however, consistently moved to support the yuan via strong biases to its currency reference rate.

Signs of another effort to prop up the yuan emerged earlier this week. China's central bank told major state-run banks to prepare to sell dollar holdings while buying offshore yuan, sources told Reuters.

The Federal Reserve, meanwhile, has fought to cool inflation and maintained an aggressive policy path this year, with three consecutive 75-basis-point interest rate hikes. That hawkishness has pushed the dollar to multi-decade highs and put pressure on other central banks to join up in a "reverse currency war."

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