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China Adds $71 Billion in Cash in Past Week to Calm Nerves

(Bloomberg) — China’s central bank continued to pump liquidity into the financial system on Friday as policy makers sought to avoid contagion stemming from China Evergrande Group spreading to domestic markets.

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The People’s Bank of China has injected a net 460 billion yuan ($71 billion) of short-term cash into the banking system in the past five working days, including 70 billion yuan on Friday. That’s helping ensure sufficient liquidity throughout the Evergrande crisis, as well as meet extra demand for funds before China’s week-long holiday at the start of October. The cost of borrowing overnight fell to 1.68%, the lowest level since late July, down from 2.28% last week.

The moves have helped calm China’s financial markets after deepening concern over Evergrande sparked a global selloff on Monday. The benchmark Shanghai stock index is up 0.3% this week, following a 2.4% slump the previous week. The injections also stand in contrast to the central government’s standoff approach to the fate of the embattled developer.

“Interbank funding stability is key to ensure the financial plumbing of the market remains intact,” said Winson Phoon, head of fixed income research at Maybank Kim Eng Securities Pte Ltd. in Singapore. “This is especially important when there is increased demand for cash given the interplay between quarter-end and Evergrande event.”

Authorities tend to loosen their grip on liquidity toward the end of the quarter due to increased demand for cash from banks for regulatory checks. And the PBOC’s operations in the past few days haven’t deviated from the previous pattern of liquidity injections when seasonal demand for funds is high.

While evidence of contagion might be muted onshore, the stakes remain high. At least seven Chinese banks rushed to assuage investors in recent days about risks from the deepening crisis at Evergrande, saying they have sufficient collateral for the loans to the developer and the risks are controllable. Meanwhile, the lack of any announcement from Evergrande concerning an $83.5 million interest payment that was due Thursday on a dollar bond adds to the uncertainty surrounding the developer’s struggles.

There’s more the central bank can do if needed, according to Phoon.

“In addition to the size of liquidity injection, the PBOC could also adjust the term of liquidity and type of instruments by providing longer term liquidity, if needed,” he said. “It helps anchor market confidence that liquidity not only will be available if needed, and will remain there as long as it is still needed.”

Financial regulators in Beijing have encouraged Evergrande to take all measures possible to avoid a near-term default on dollar bonds while focusing on completing unfinished properties and repaying individual investors.

The Shanghai Composite Index was down 0.4% as of 2:10 p.m. local time.

“Liquidity easing by the PBOC is aimed at easing market concerns in case Evergrande’s woes turn disorderly,” said Eugene Leow, rates strategist at DBS Bank Ltd in Singapore. “Depending on how long this issue takes to resolve, the PBOC is likely to err on the side of caution,” he added.

(Updates price in third and 10th paragraph, and adds background on PBOC’s pattern of liquidity injections in fifth paragraph.)

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