PBOC injects liquidity to buoy economy

China's central bank on Tuesday launched a third round of reverse repurchase (repo) operations, aiming to ease the market squeeze and buoy weaker-than-expected economic growth.

The 14-day repo operations worth 95 billion yuan (15.08 billion U.S. dollars) came after the People's Bank of China (PBOC), or the central bank, conducted rounds one and two in January and May, injecting at least 400 billion yuan of liquidity into market.

The latest move meant the banking liquidity remained tight and the world's second-largest economy needed a cash injection to boost its slower-than-expected growth, analysts said.

Wang Tao, an economist with UBS AG, attributed the tight liquidity in the banking system to less inflow of foreign exchange and increased lending demand.

Analysts said market liquidity is to some extent decided by the amount of yuan funds outstanding for foreign exchange, which represented the yuan funds that that PBOC had to inject into the market to offset the same amount of foreign exchange inflow from trade surplus and overseas speculative money, as yuan remained inconvertible under the capital account.

As the deepening sovereign debt crisis in Europe and shrinking external demand sap China's foreign trade, yuan funds outstanding for foreign exchange has slowed sharply since early this year.

PBOC data showed last month that the yuan funds outstanding for foreign exchange increased 23.4 billion yuan, and the average monthly reading for the first five months of 2012 stood at 50 billion yuan, only a quarter of the amount for last year.

Despite the central bank's consistent liquidity injection in the past three weeks, lending rates posted a slight increase which indicated strong demand for cash.

On Tuesday, Shanghai Interbank Offered Rates, which measure the cost to banks of borrowing from one another as a key barometer of liquidity, were higher for short-term borrowing no longer than three months.

If open market operations fail to ease the tight money supply, analysts expect the PBOC will lower the bank's Reserve Requirement Ratio (RRR) further, and the monetary policy might shift from prudent to relatively easy.

Nearly a third of respondents to a recent survey of Chinese bankers said they believed the monetary policy would be eased, an increase of 25 basis points.

The PBOC has lowered the RRR twice this year, releasing at least 800 billion yuan of liquidity. It also cut lending and deposit rates to spur growth, the first such move in nearly three years.

China's economic growth slowed to a near-three-year low of 8.1 percent in the first quarter, dampened by sluggish exports and a self-geared cool-down in the real estate industry and other fixed-asset investment projects.