China launches new lending tool before year-end loan expiry

China's central bank launched a new lending tool on Monday to inject more liquidity into the market and support credit flow in the banking system ahead of the expiration of trillions of yuan in loans at the end of the year.

The People's Bank of China said in a statement it had activated the open market outright reverse repo operations facility to "maintain a reasonable abundance of liquidity in the banking system and further enrich the central bank's policy toolbox."

Some 2.9 trillion yuan ($406.6 billion) in medium-term loans are due to mature between now and the end of December, which would make it harder for banks to finance investment and revive flagging growth in the world's second-largest economy.

Despite taking effect on Monday, the PBOC did not mention the new tool in its open market operations statement.

In a separate statement announcing the new facility, the PBOC said it would use it to trade with primary dealers in OMO on a monthly basis.

The announcement said the new tool would have a tenor of less than one year, longer than those for regular reverse repo operations, which typically have tenors of seven, 14 or 28 days, are conducted daily and normally require collateral.

"It looks like a technical optimization, part of an effort by the central bank to make its monetary policy framework more functional and to better regulate liquidity provision," said Xu Tianchen, senior economist at the Economist Intelligence Unit.

"This type of repo is far more common in the European Union and the United States, so it's a step to modernize the PBOC's policy toolbox and bring it more in line with them," he added.

Beijing is counting on massive financial stimulus announced in September to kick-start lending and investment, as a sharp