Red envelope rain highlights Beijing’s dilemma amid weak economic outlook

The massive amount of red envelope money given out by China’s central bank recently is not sufficient to quench long-term capital demand, analysts say, with mainland companies still craving more liquidity.

Last month, the People’s Bank of China (PBOC) carried out the biggest cash injection in more than three years through open market operations (OMO). By Monday, the capital it had pumped into the system through OMO, lasting until after the Lunar New Year, was roughly 1.09 trillion yuan (HK$1.29 trillion).

That’s more than 2.5 times the volume last year, Natixis said in a report issued last week, and more than new yuan loans by domestic financial institutions in December (610 billion yuan), or the 673 billion yuan in capital that could be released through a 50-basis-point cut in banks’ required reserve ratios (RRR).

However, OMOs alone “could not solve the fundamental problem that corporates, particularly smaller private companies need cheaper credit” Natixis senior economist Iris Pang said.

“OMOs are short term in nature, and because of this banks may not be able to transmit enough liquidity to the non-bank credit sector,” she said. “As a result, it could not solve the problem that the weakening China [economy] needs lower interest rates in the whole financial sector.”

Cash injected through OMOs, most of which are conducted through repurchase agreements, is typically short-term money. The repurchase agreements conducted in January mostly carry 28-day maturities, meaning the newly created money will be drained from the system this month.