Cash Liquidity Becomes Loose on China Central Bank’s Open Market Operations

SHANGHAI, Aug. 16 (SMM) -- China’s central bank has injected a net RMB 165 billion into the market since mid-July. There is little chance China’s central bank will raise interest rates or the reserve requirement ratio based on recent domestic and international economic conditions, and the bank will manage liquidity through open market operations more frequently.

According to data from China’s central bank, the bank issued RMB 2 billion 1-year central bank bills on August 9th, and launched RMB 83 billion 28-day repurchase operations, with the capital returns of RMB 85 billion that day. China’s central bank issued RMB 7 billion 3-month central bank bills on August 11th, and bid prices are RMB 99.24, with the yields remaining unchanged at 3.0801% for the sixth consecutive week. At the same time, the bank launched RMB 30 billion 91-day repurchase operations at the yield of 3.08%, which also remained stable. In general, China’s central bank drained RMB 122 billion of funds from the money market last week, with the scale significantly improving. Since the bank has injected net funds into the market for four consecutive weeks, cash liquidity becomes loose after ending July’s tightening trend.

With regard to the next phase of monetary policy trend, China’s central bank said in its 2Q monetary policy report released last Friday that it will use interest rates, exchange rate, open market operations, reserve requirement ratio and prudent macroeconomic management as a portfolio to maintain a reasonable scale and pace of social financing. In this context, China will mainly use open market operations to manage liquidity and shift the tightening monetary policy to the prudent monetary policy during the remainder of 2011 given uncertain domestic and international economic conditions, possibly easing inflationary pressures in China, as well as lower possibility of interest rate and reserve requirement ratio hikes.