PBOC switches to liquidity injection

The People's Bank of China (PBOC), the country's central bank, swung back to liquidity injection this week with 128 billion yuan (20.9 billion U.S. dollars) being pumped into the banking system through its regular open market operations.

The PBOC move marked a turn-around in the central bank's open market operations last week when it drained 35 billion yuan from banks in the open market after hedging the funds released by due bills with its bill issuance and repo sales.

The central bank conducted two open market operations each week on Tuesday and Thursday, respectively, to adjust liquidity in the country's banking system.

A total of 158 billion yuan in repurchase agreements (repos) is set to mature this week, while the central bank took 30 billion yuan out of the market via the open market operations.

Analysts have interpreted the liquidity injection as a sign of the PBOC's willingness to boost market liquidity amid a tightening monetary environment.

Lianxun Securities analyst Yang Weijiao said China's money market is currently experiencing a shift caused by a slowdown in foreign capital inflows since the beginning of the month.

In addition, commercial banks started to hand over the fiscal revenues they keep to the state treasury, a move that usually take places between April and August each year.

As a result of the tight money supply, the Shanghai Interbank Offered Rate (Shibor) has climbed for multiple maturities, with the overnight Shibor surging about 150 basis points since May 15.

Yang said China's foreign exchange purchase position, a key gauge of the level of capital inflow, is expected to grow at a slower pace in May after five months of rapid increases.

Official figures showed that yuan holdings for purchasing foreign currency increased to 1.5 trillion yuan in the first four months of the year, more than tripling the figure for the whole of 2012.

The central bank has been taking capital out of the open market through repeated repos, as well as resumed bill issuances one week ago.

To curb the fast increase in capital inflow, China's forex regulator recently strengthened oversight for the operations of traders and commercial banks to fend off risks brought by speculative funds seeking arbitrage.

Zhou Wenyuan, an analyst with Guotai Junan Securities, also projected a likely decline in yuan holdings, saying risks for arbitrage are increasing.

"In the coming quarter, it is likely that we will see an obvious change in the money market supply," Zhou said.