China’s Lunar New Year, marking the start of the Year of the Snake, falls on Wednesday, January 29.
The official public holiday spans 8 days, from January 28 (New Year’s Eve) to February 4.
During this period, many businesses and government offices close, allowing people to travel home for family reunions. Celebrations traditionally continue for 16 days, culminating with the Lantern Festival on February 12.
With this long holiday comes a large demand for cash (more on this below if you want it).
The People’s Bank of China is in preparation mode, injecting funds today for 14 days rather than the usual 7 days:
The People’s Bank of China (PBOC) injects a large amount of funds into the financial system before the Lunar New Year mainly to address seasonal liquidity demands. Here’s why:
1. Increased Cash Demand
- The Lunar New Year is the biggest holiday in China, and people withdraw large amounts of cash for travel, gifts, and traditional red envelope (红包, hóngbāo) giving.
- This leads to a significant outflow of cash from banks, reducing liquidity in the financial system.
2. Corporate Demand for Funds
- Many companies pay year-end bonuses to employees before the holiday, increasing cash demand.
- Businesses also need extra funds to settle accounts, repay loans, and make advance payments before the long break.
3. Bank Liquidity Tightening
- The increased cash withdrawals and corporate payments tighten liquidity in the banking sector.
- Banks require more short-term funds to maintain stable operations and lending activities.
4. Preventing Volatility in Financial Markets
- If liquidity dries up too much, interbank lending rates (e.g., SHIBOR) can spike, affecting the stability of financial markets.
- The PBOC’s fund injections help stabilize interest rates and ensure smooth market functioning.
5. Supporting Economic Growth & Confidence
- The Lunar New Year is a major period of consumer spending and economic activity.
- Providing ample liquidity ensures banks can continue lending to businesses and individuals, supporting overall economic momentum.
