China's central bank boosts liquidity ahead of tax payment surge

China’s central bank used open-market operations to inject the largest amount of cash into the banking system since May, as upcoming corporate tax payments tighten liquidity conditions.

The People’s Bank of China on Tuesday net injected 250 billion yuan ($35 billion) via seven-day reverse repurchase agreements, according to a statement. There were no facilities coming due Tuesday, and the central bank kept the rate steady at 2.55 per cent. China’s 10-year bond yield was little changed at 3.22 per cent.

The central bank is acting to fine-tune interbank liquidity conditions while it keeps broader monetary-policy settings stable, seeking to keep credit growth appropriate while avoiding rapid debt build-up as the economy slows. 

The move comes before an October 24 deadline for companies to pay tax, which typically increases the demand for cash and tightens liquidity.

The PBOC injected a net 490 billion yuan in the four days though October 25 last year, and acted last week to funnel 200 billion yuan in one-year funds into the system.

“Part of the timing is that we’re in the tax season, but a big part is that China wants to make sure there’s ample liquidity in the system,” said Gerry Alfonso, executive director of the international business department at Shenwan Hongyuan Group Co. “There are a lot of ups and downs, they want to calm the market, and they want to do it in a delicate way.”

Government bonds tumbled and a gauge measuring traders’ bets on liquidity tightness jumped to the highest level since May on Monday. 

Investors turned cautious after local banks unexpectedly kept the base rate for corporate loans unchanged. A local report saying China may limit sales of bond funds also damped sentiment.