PBOC eases liquidity through reverse repos

BEIJING -- China's central bank pumped a record amount of liquidity into the money market this week through its open market operations on Thursday, a day after the central banker said he won't rule out using any monetary tools to spur the slowing economy.

The People's Bank of China, the central bank, carried out reverse repurchase agreement (repos) operations worth 145 billion yuan ($22.91 billion), injecting 278 billion yuan of liquidity into banks this week after hedging funds due in the open market.

Yields of the 7-day and 14-day reverse repos stood unchanged at 3.4 percent and 3.6 percent, respectively.

On Tuesday, the PBOC carried out similar reverse repos operations worth 220 billion yuan.

The liquidity injected through the open market operations this week -- the second-highest weekly net injection this year -- was equal to cutting banks' reserve requirement ratio by about 30 basis points.

Zhou Xiaochuan, the central bank governor, on Wednesday night said the PBOC will not rule out the use of any policy tools. He made the remarks in response to a question on whether the PBOC prefers to open market operations rather than cut the benchmark interest rates or the RRR on the sidelines of a ceremony.

As the reverse repos will become due in one or two weeks, the PBOC will have greater flexibility in fine-tuning the monetary policy than lowering the RRR.

The central bank can tighten banks' liquidity through sales of bills and repos.

Analysts said the central bank's liquidity injection in the open market has made a cut in the RRR less likely in the short term.

"The result of the PBOC's open market operations this week has the same effect of lowering the RRR in the short term, thus dampening market expectations of a imminent RRR cut," said E Yongjian, a financial analyst with Bank of Communications.

Since the beginning of this year, the PBOC has slashed the RRR twice by 100 basis points altogether and lowered benchmark interest rates two times by 0.5 percentage point, leaving the current RRR at 20 percent and the benchmark interest rate for one-year deposits at 3 percent.

Lu Zhengwei, chief economist of the Industrial Bank, said reverse repos will become a routine macro control policy tool, as the central bank can precisely control the extent of liquidity easing.

"Through changes in the yields of reverse repos, the central bank can let the market know how it views the current interest rates and inflation and guide changes in lending rates in the future," Lu said.

Short-term borrowing costs between Chinese banks rose higher in the country's money market on Thursday, as suggested by interbank market yields.

The overnight Shanghai Interbank Offered Rate (Shibor), which measures the cost of interbank borrowing as a key barometer of liquidity, dipped 2.5 basis points to 3.055 percent on Thursday.

The one-week Shibor remained unchanged at 3.8 percent, while the two-week Shibor fell 55.06 basis points to 4 percent.

Qu Hongbin, chief economist with HSBC China, said he expects China to adopt more stimulus measures in the future, as the PBOC still has room to cut the RRR by 200 basis points and the interest rate by 25 basis points by the end of the year.