China has increased its liquidity injection into the banking system via a policy tool recently launched this month, in a bid to ensure sufficient liquidity amid increased sales of local government bonds.

The People’s Bank of China entered into reverse repurchase agreements worth $111 billion in November, it said in a statement released Friday (November 29). The contracts are for a duration of three months and aim to preserve reasonably sufficient liquidity in the banking system, according to the press release. This exceeds the 500 billion yuan (S$92.5 billion) injected last month.

In a separate statement, the central bank said it purchased a net 200 billion yuan of sovereign bonds from brokers in November. The aim was also to ensure a plentiful liquidity reserve, the People’s Bank of China said.

The injection would help ease financing pressure on the market, after China launched a $1.4 trillion program to help local governments deal with off-balance sheet debt by allowing them to sell more bonds. That means banks, the main investors in these securities, would need more liquidity to absorb the increased debt supply while continuing to lend to consumers and businesses.

China’s economy has improved thanks to a stimulus campaign launched in late September, with consumption boosted by government subsidies. Although the country is expected to meet its growth target of around 5% this year, it still faces thorny long-term problems, including stubborn deflation and a potential trade war with the United States.

The PBOC began a transition of its policy toolkit earlier this year to more effectively influence market borrowing costs and better coordinate with fiscal policy. As part of the shift, it began trading government bonds in August and launched the outright repo tool last month.

These programs are expected to play a major role in liquidity management in the future, as old tools like the medium-term loan facility are downplayed. The People’s Bank of China in November drained 550 billion yuan of net liquidity over one year via a medium-term loan facility (MLF).

Some analysts raised the possibility that the PBOC purchased local government bonds through the outright repo program in October. The tool allows the PBOC to purchase securities, including sovereign bonds, local government bonds and corporate debt, from financial institutions, and resell them at a later agreed time. BLOOMBERG