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China drains liquidity from markets ahead of Lunar New Year

Unusual step designed to keep stocks and real estate from overheating

China usually pumps liquidity into the markets ahead of Lunar New Year, a peak time for travel in the country.   © Reuters

SHANGHAI -- China has withdrawn 320 billion yuan ($49.5 billion) from financial markets in about two weeks, as authorities focus on removing excess liquidity to tame the surge in property and asset prices.

It is rare for China to curb liquidity ahead of the Lunar New Year holiday, which starts on Thursday this year. The move could hinder the country's economic recovery from the coronavirus-induced slump, with effects spilling into overseas markets as well.

Though the People's Bank of China said Friday it would inject 100 billion yuan into the markets ahead of the holiday, another 100 billion yuan worth of operations matured that day, resulting in no net change to liquidity. The two-week interbank lending rate remains relatively high at almost 3%.

The overnight rate topped 6% at one point in late January.

China's central bank usually increases liquidity in the weeks leading up to Lunar New Year, when many Chinese return to their hometowns or travel. The bank had injected 600 billion yuan into the markets by a week out in 2020, and 500 billion yuan in 2019.

Less demand for cash than usual is possible, as authorities discourage travel due to the pandemic.

But the PBOC's real motive for decreasing liquidity is "to prevent an excessive rise in property and stock prices and to lower credit risks in the future," Founder Securities analyst Qi Sheng said. Many market insiders agree with Qi.

Chinese President Xi Jinping is working to curtail speculation in the property market, yet housing demand remains strong in big cities like Shanghai, Beijing and Shenzhen.

Condo developer China Vanke reported a 30% jump in home sales on the year for January to 7.14 billion yuan. Sales appear to be trending upward, though it is difficult to draw a meaningful comparison from 2020, when COVID-19 upended economic activity.

China injected troves of cash into the market last year to carry its economy through the pandemic. But the increased liquidity has boosted asset prices recently. The Shanghai Composite Index topped 3,600 last month, at one point gaining as much as 36% from its low in March 2020.

To prevent a property bubble, China has tightened restrictions on property sales in over 30 cities since summer, including a cap on the number of homes a family can buy. In cities like Shanghai and Ningbo, residents now face waiting periods to buy a new home after a divorce. Banks also are adopting a lengthier screening process and caps on mortgages, in line with official guidance.

Investment bank China International Capital Corp. predicts the country's money supply will increase about 9% in 2021, compared with over 10% in 2020.

Beijing's recent moves could sap the economy. But China's gross domestic product is expected to grow at a brisk 7% to 8% in 2021, and the government can afford some setbacks if it means preventing bigger issues down the line.

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