China’s central bank faces a tough balancing act, trying to ease credit in the financial system without adding to pressures weakening the Chinese currency.
Concerns about the yuan and the annual cash crunch ahead of next month’s Lunar New Year holiday dominated a meeting held by the People’s Bank of China on Tuesday, according to minutes of the meeting reviewed by The Wall Street Journal and to accounts from banking executives close to the PBOC.
Central bank officials delayed using a traditional credit-easing tool for fear that it could add more downward pressure on the yuan, according to the minutes and the executives. Instead, to meet the rising cash needs from banks, the central bank turned to short-term and medium-term loan facilities to pump about 1.6 trillion yuan ($243 billion) of temporary liquidity into the banking system in the past week.
The decision highlights the bank’s deepening dilemma in helping to cushion the slowing Chinese economy.
Just a year ago, the PBOC addressed preholiday cash demands by resorting to a more typical method—cutting the amount banks are required to keep in reserve. Since then, the economic slowdown and volatility in the stock markets have led to a flood of capital leaving China, as Chinese investors seek better returns abroad. The yuan, also known as the renminbi, has been battered harder than the central bank would like, even as it faces calls to keep easing credit and rekindle growth.