PBOC facing dilemma over tight liquidity conditions

China's money market will continue to be afflicted by tight liquidity conditions through to the end of June, putting the central bank in a dilemma over whether to loosen its monetary policy, Guangzhou Daily reported Monday, citing industry watchers.

The lack of liquidity was indicated by the disappointing response to a government debt auction Friday, as financial institutions did not have sufficient capital to buy all the government bonds, said the report, citing analysts including Shi Lei, deputy general manger of the fixed-income division at Ping An Securities.

The Ministry of Finance failed to sell all of the bonds at the auction on Friday, the first time this has happened in almost two years.

Analysts believe a sharp fall in foreign exchange flows into the country is the major reason for the slump in liquidity.

The country's financial institutions bought 66.9 billion yuan ($10.9 billion) in foreign exchange during May, a sharp fall from the April reading of 294.4 billion, according to data released Friday by the central bank.

Despite a decline in the overnight rate on Monday, which indicates improving liquidity conditions compared to last week, the benchmark seven-day repo rate on Monday remained close to record-high levels due to the fall in foreign capital inflows, according to Reuters.

In this context, some industry watchers expect possible moves from the central bank to loosen controls on liquidity, the Guangzhou Daily report said, but others believe that a change in monetary policy is unlikely.

The overall funding in the country's interbank market remains sufficient, although some individual banks are feeling capital pressure, said an article published Monday in the central bank-run Financial Times newspaper.