PBOC lets pre-holiday funds drain from market

The People's Bank of China (PBOC), the central bank, skipped a regular open market operation on Tuesday by not injecting 330 billion yuan ($54.45 billion) of liquidity into the money market.

A total 450 billion yuan, previously added to the market before the Spring Festival holidays through reverse repos, was due to mature this week: 330 billion yuan on Tuesday and another 120 billion Thursday.

The fact that the PBOC declined to act Tuesday to offset maturing liquidity injections means 330 billion yuan will flow out of the banking system.

The central bank traditionally carries out open-market operations twice a week to control liquidity in the money market.

"The central bank injected a lot of money before the holidays through open market operations, but now the demand for cash is not as strong and the money market is stable," Zhang Lei, a Beijing-based macroeconomic analyst with Minsheng Securities, told the Global Times Tuesday, "The central bank has every reason to allow open market operations to return to normal."

The seven-day Shanghai Interbank Offered Rate, or Shibor, a key gauge of liquidity for the country's banking system, dropped 9.8 basic points to 5.2 percent Tuesday.

The rate hit 6.32 percent on January 20, the highest in the month, forcing the PBC to inject 255 billion yuan of fresh funds into the market. This followed a jump to 8.84 percent on December 23 and a record high of 11 percent on June 20, 2013 amid interbank tight liquidity.

Although there is still liquidity pressure in the market, Zhang said, the central bank will be prudent in its base money policy and "would use market operations and other tools to adjust liquidity instead of issuing new notes especially after a liquidity crisis last June."

"After the money market returns to normal following the holidays, the central bank will continue to keep a normal or relatively tight stance in its monetary policy and open market operations," E Yongjian, a researcher at the Bank of Communications in Shanghai, told the Global Times Tuesday.

In a quarterly monetary policy report released Saturday, the PBOC said it will apply a mix of tools including open market operations, reserve requirement ratio, relending and rediscounting to manage liquidity.