Analysts forecast prudent currency control

To further drain liquidity from the country's banking sector, China's central bank on Thursday resumed the issuance of repurchase (repo) agreements, and analysts are interpreting recent small-scale open market operations as signs of a prudent monetary policy.

After suspending open market operations last Thursday and on Tuesday,the People's Bank of China (PBOC) started another round of 28-day repos worth 5 billion yuan (796 million U.S. dollars) on Thursday, with the bid interest rate unchanged from previous repos, according to a PBOC statement.

Given the country's steady economic growth, a global flood of liquidity and domestic inflationary pressure, China will carry out neutral currency controls while setting a prudent policy tone, said Lian Ping, chief economist with the Bank of Communications.

Lian said chances are slim that the monetary policy will be further eased or tightened.

On Feb. 19, the PBOC re-introduced 30 billion yuan in repos for the first time since June 2012, and it added another 5 billion of repos into the total drain on Feb. 26. The moves sparked speculation about future hawkish monetary control.

However, Zhou Xiaochuan, governor of the PBOC, on Friday attributed the repeated repos to "Spring Festival factors," saying the central bank did it to drain liquidity that had been injected into the interbank market prior to the holiday via a huge reverse repo of 860 billion yuan.

Future liquidity adjustments have to be made based on economic data for the first two months, Zhou added.

In a government work report delivered at the parliament's ongoing annual session on Tuesday, Premier Wen Jiabao said the central government expects China's broad money supply (M2) to expand 13 percent in 2013, 0.8 percentage points lower than the actual increase last year.

The country will maintain a proactive fiscal policy and a prudent monetary policy in 2013, Wen reiterated.

"China's current M2 stands at an enormous scale of about 100 trillion yuan. The 13-percent forecast indicates the PBOC's cautious attitude toward money supply," Lian said.

Wang Tao, chief economist with UBS Securities, agreed that the government is adopting a neutral policy to support economic recovery while refraining from an overly relaxed policy that may result in economic overheating.

The lowering of the M2 forecast does not necessarily signal a policy tightening, Wang said, adding that M2 has become a weaker sign for reflecting currency and credit status due to the rapid expansion of off-balance-sheet financing in the banking sector.

Analysts say the central bank will rely mainly on open market operations to lead the trend of market interest rates, with reserve requirement ratio cuts unlikely in the future.