The People's Bank of China pumped 810 billion yuan into the market this week, in its largest weekly open market operation in five months. The action is known as reverse repurchase agreements, or reverse repos, and it's aimed to relieve pressure on cash supplies during the upcoming National Day holiday. Will the move help sooth tensions in the pre-holiday money market?
The PBOC allotted 100 billion yuan in reverse repos to commercial banks on Friday in a continuing drive to ensure market liquidity. The central bank does that by buying bonds from commercial banks to give them more cash on hand. The banks then agree to repurchase the bonds later at a slightly higher rate. Experts say the PBOC's recent activity is its way of avoiding a liquidity shortage during the holiday season.
"It's a little bit over the top to describe the shortage as a "serious" one. It's just that capital needs are comparatively higher these days. For example, people need to take money out of their banks to prepare for holiday trips. That's a characteristic of the holiday season. According to what we've observed, the recent liquidity shortage is not as serious as previously. This is a common shortage in the end of the month," said Chen Ji, senior analyst, Bank of Communication.
The Shanghai Interbank Offered Rate which reflects the lack of funding saw a continued increase over the past 13 days before finally easing on Friday.The representative seven-day SHIBOR rate was down 0.2 percentage points from Thursday. Chen says the PBOC will continue its moderate monetary policy in the near future. That's because both the Bank of Japan and the U.S. Federal Reserve announced this week that they won't change their current monetary policies.
"The exterior environment may have some impact on China's economy, but not very much. China's capital market is not totally open to the outside. Despite the fact that there is a trend to a more open market, it still has a long way to go. Our judgment is that the central bank will not be making any large adjustments," Chen said.
Chen says he expects to see more moderate actions by the central bank in the near future -- perhaps the use of the Pledged Supplementary Lending and Medium-term Lending Facility. Both actions allow for longer lending periods than reverse repos.
