The People's Bank of China pumped more money into the economy again on Wednesday, continuing April's series of large reverse repo actions. The PBOC has conducted reverse repos every working day since April 5th. That has included frequent Medium-term Lending Facility loans that also lend money to the banks. What's behind all this? 

The most common tool the PBOC uses to inject liquidity into the money markets is reverse repurchase agreements. The central bank buys bonds from commercial banks which gives the lenders more cash on hand, and the banks then agree to buy the bonds back later at a slightly higher rate within a fixed period of time. Today the PBOC injected another 120 billion yuan on the top of 680 billion it had put in last week. Last week's figure was only 10 billion yuan shy of the PBOC's largest weekly injection ever.

"The current liquidity shortage is regional, due to reasons like business taxes coming due in in April. The net amount injected in all of last year was only some trillions of yuan. But since the beginning of this year, the PBOC has already put over six trillion yuan into the market. The PBOC now prefers to use this more marketized tool to control market liquidity," said Chen Ji, Senior Analyst of Bank of Communications.

The lack of funding in the economy has been reflected by the Shanghai Interbank Offered Rate, an indicator of money market liquidity. The representative seven-day SHIBOR rate has seen an almost vertical increase during the past week. To better deal with situations like this, the PBOC in 2014 introduced a new tool called the Medium-term Lending Facility. This has a longer lending period than reverse repos, allowing at least three months for repayment, and on Monday this week the central bank used the new tool to lend 267 billion yuan to 18 financial insitutions. That was the fifth time the medium-term facility had been used this year. 

Despite more frequent open-market operations by the central bank, Chen says the liquidity situation is not too bad -- if it were the central bank would be resorting to stronger measures, such as cutting the reserve requirement ratio.

"Open-market operations are different from cutting the reserve requirement ratio. Cutting the requirement ratio is an one-time action which releases all the money in one shot. But the open-market operations are used to adjust regional liquidity. In other words, I lend you some money and you get it back to me when the liquidity is sufficient. But cutting the reserve requirement ratio is stronger, and could represent a fundamental transition," Chen said, "So facing short-term and regional liquidity problems, the PBOC is choosing a marketized tool. That's why we are seeing frequent open-market operations."

Chen believes the fact that the PBOC is using a relatively moderate tool to boost market liquidity indicates that we are unlikely to see any cuts in the banks' reserve requirement ratio in the near future.