By Pete Sweeney and Lu Jianxin
SHANGHAI, Feb 5 (Reuters) - China's central bank injected a
whopping 450 billion yuan ($72.20 billion) into the money
markets on Tuesday, the largest single-day injection on record,
showing Beijing's increased confidence in its ability to use
short-term precision tools to manage the money supply.
Traders told Reuters that the infusion of cash was made
during ordinary open market operations, using 14-day reverse
bond repurchase agreements, which will drain money back out of
the system in two weeks.
The People's Bank of China (PBOC) has increasingly relied on
such tools to maintain short-term liquidity and hold down
interest rates, instead of making longer term adjustments such
as cuts to bank reserve requirement ratios (RRR) that regulators
fear could provoke inflation.
Liquidity typically tightens with the approach of the
Chinese Spring Festival holiday, as individuals withdraw cash to
spend on gifts, food and travel.
Some analysts had speculated that the central bank might be
forced to cut the RRR before the holiday to prevent a squeeze,
but instead authorities leaned more heavily than ever on
short-term open market operations.
'With the Spring Festival drawing near, short-term liquidity
in the money market is relatively tight,' said a senior trader
at a Chinese state-owned bank in Beijing.
The central bank has steadily been injecting cash since last
week to stabilise short-term rates, he said, which often spike
in the runup to traditional festivals. Markets will be closed
for a week starting on Feb. 9 for the Chinese Spring Festival
This time around it appears the PBOC has found the right
formula to keep rates relatively stable, said Frances Cheung,
strategist at Credit Agricole CIB.
'We have not seen the spikes in repo rates that we usually
did see ahead of the Chinese New Year, likely upon willingness
from the PBOC to provide liquidity,' she wrote in a research
note distributed on Tuesday morning.
The benchmark 7-day repo rate began moving
upward as the Spring Festival approached, but Tuesday's massive
injection has signalled to the market the bank's determination
to keep rates in check by lowering the price of money.
A total of 198 billion yuan in maturing instruments are set
to drain cash from the markets this week, which will be more
than offset by Tuesday's injection, and the bank has the option
to inject even more funds during upcoming open market operations
'Now that the central bank has announced that it will more
frequently use open market operations to adjust liquidity, the
market widely expects that money market rates will stabilise and
will not spike too much even during holidays or at the end of
months or quarters,' said the senior trader in Beijing.
Market participants said the PBOC's recently announced
decision to allow select institutions to bid for reverse repos
on a daily basis, instead of just on Mondays and Wednesdays,
shows that it is planning to intensify the tempo and precision
with which it moves money in and out of the interbank market.
'We believe interbank rates will only climb a little bit the
rest of this week and the PBOC is unlikely to cut RRR as it
avoids sending easing signals,' wrote Ting Lu and Xiaojia Zhi,
economists at Bank of America Merrill Lynch, in a research note
Tuesday's injection overturns the previous record of 395
billion yuan injected on Oct. 30, 2012.
($1 = 6.2328 Chinese yuan)
(Editing by Edmund Klamann)
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Keywords: CHINA OPENMARKET/REPO
(Click on the following for historical data on: PBOC repo issues: PBOC repos outstanding: PBOC bill issues: PBOC bills outstanding: Reports on PBOC open market operations:)
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