PBOC's Record Liquidity Injection Amid Yuan Depreciation

China's total outstanding reverse repo operations have surged to approximately 4 trillion yuan, doubling compared to January 2024. These figures reflect the increasing reliance of the Chinese financial system on central bank interventions to maintain market liquidity. Meanwhile, the yuan's exchange rate against the U.S. dollar has depreciated by 5.7% year-over-year, with its offshore counterpart trading at 7.34 per dollar as of January 25, 2025. These data underscore the scale of the challenges the PBOC is attempting to manage, as depreciation threatens to destabilize import costs and drive capital outflows.

The offshore yuan fell by 0.2% against the dollar following the PBOC's announcement, reflecting the ongoing vulnerabilities in China's currency markets. Contributing to this weakness are speculative attacks on the yuan, driven by widening yield differentials between China and the United States, as well as fears surrounding China’s declining growth trajectory.

Donald Trump’s recent comments about introducing tariffs on foreign goods—particularly pharmaceuticals, semiconductors, and critical metals—highlight the potential for further disruption to global trade. These sectors represent key pillars of China’s export economy, which accounted for 35% of GDP in 2023. Exports to the U.S. alone contracted by 18% in 2024 due to existing tariffs and global economic headwinds, and further trade barriers could significantly damage the yuan's stability.

China's current reserve requirement ratio for major banks stands at 10.5%, which is higher than that of many advanced economies, such as the U.S. (0%) and the Eurozone (1%). A 0.5% RRR cut could inject an estimated 700 billion yuan ($96 billion) of liquidity into the system, potentially alleviating the financial stress faced by small and medium enterprises (SMEs). However, concerns over capital flight—estimated at $65 billion in Q4 2024 alone—may have stayed the PBOC’s hand, as policymakers prioritize currency stability over liquidity needs.

Critics argue that delaying RRR cuts reflects a lack of confidence in the effectiveness of these measures amid China’s current economic malaise. The PBOC seems overly focused on currency stabilization at the expense of fostering economic growth, a strategy that risks stalling China’s recovery altogether. In my view, this represents a miscalculation, as the long-term benefits of broad monetary easing far outweigh the short-term risks of yuan depreciation.

Data from the National Bureau of Statistics (NBS) shows that China's manufacturing PMI dropped to 48.9 in December 2024, below the 50-point threshold that separates expansion from contraction. Retail sales growth also slowed to 3.4% in Q4 2024, compared to 5.7% in the same period of 2023. These indicators highlight the fragile state of domestic demand, which remains a significant drag on economic recovery.

Adding to the strain is the record-breaking slide in bond yields, which has discouraged foreign investment and further eroded confidence in China’s financial markets. The PBOC’s decision to suspend its government bond-buying program this month, presumably to curb speculative activities and stabilize yields, highlights the fine line it must walk between stimulating growth and maintaining financial stability.

China’s A-share market has struggled to attract sustained foreign interest, with net outflows totaling 120 billion yuan in 2024. The Shanghai Composite Index has underperformed global benchmarks, delivering a meager 2.1% return last year compared to the MSCI World Index’s 10.5%. By encouraging investment in yuan-denominated A-shares, the government hopes to offset outflows and strengthen the domestic financial system. However, the success of these measures will depend on overcoming investor skepticism, which has been fueled by Beijing’s piecemeal approach to economic stimulus and persistent concerns over regulatory risks.

The ongoing property market crisis, highlighted by the financial struggles of developers like Evergrande and Country Garden, further compounds these issues, with property sales plummeting by 17% in 2024. This sector accounts for approximately 30% of GDP, and its continued weakness risks dragging down the broader economy.

​In my opinion, the PBOC’s cautious approach reflects a failure to fully grasp the gravity of China’s economic challenges. By prioritizing short-term stability over long-term growth, the central bank risks entrenching the very vulnerabilities it seeks to address. Going forward, a more comprehensive and proactive policy framework will be essential to ensuring China’s economic resilience in an increasingly uncertain world.