Banks in China have to hoard liquidity ahead of their weeklong holidays, twice each year. The bigger of the two, related to the Chinese New Year, occurs in either January or February. The second, associated with China’s National Day, takes place at the beginning of every October and is still a formidable challenge to the monetary system. Depositories build up their cushions so as to be prepared for when the Chinese people hold extra currency, or lower deposit balances, knowing that for an entire week the banking system will be closed and therefore unable to process transactions.

To try and accommodate the imposition, the People’s Bank of China, the country’s central bank, will increase its monetary base stockpile in advance. Relying on statistical forecasts, central bankers attempt to predict the nation’s gargantuan cash need which can run into additional trillions. The goal is to increase systemic liquidity beforehand such that local illiquidity as a normal part of the holiday schedule doesn’t become anything more than the usual nuisance.

For China’s National Holiday, that means accommodation falls in September. And for the banking system in the same month, rising illiquidity if the PBOC isn’t nimble.

This year’s challenge was as difficult for officials as it was three years ago. To support CNY, to keep the currency exchange from falling further, authorities used more foreign “reserves” than they had been throughout the year. This simply means to supply “dollars” into the local Chinese system that requires them for everyday economic necessity.

If the eurodollar market isn’t being supportive, the PBOC either has to step in and subsidize or directly supply the marginal dollar requirement (“short”), or let banks fend for themselves (huge CNY negative; the price Chinese banks “short” dollars must pay to keep them flowing).

But if the PBOC opts for some flavor of “dollar” rescue it constrains itself for its own purposes – including systemic liquidity surrounding the Golden Weeks. The connection between the eurodollar system and domestic RMB money supply is discussed in more detail here.