China’s PBOC Drains US$7.9bn from Money Markets

In an unanticipated move the People’s Bank of China (PBOC) has drained 48 billion renminbi (RMB), the equivalent of US$7.9bn, from money markets.

China’s central bank withdrew the cash by issuing 14-day bond repurchase agreement (repos), the first time since last June it had repos to drain liquidity from the money market.

The PBOC website confirmed that RMB48bn of 14-day repos were conducted at 3.8%. The monetary authority last issued such contracts on 6 June, when it sold RMB10bn of 28-day repos. The 3.8% rate is higher than both the 2.75% in the June auction and the 2.05% when the PBOC last issued 14-day repos in January 2011.

The PBOC’s move was seen as a response to sharply higher bank and shadow lending last month. New local currency loans of RMB1.32 trillion were nearly three times December’s total, and RMB200bn above market expectations. It was the highest monthly total in four years.

“The central bank needs to maintain funding costs at an appropriate level, and a seven-day repo below 4% isn’t normal,” Huang Wentao, a Beijing-based bond analyst at China Securities, told news agency Bloomberg. “The PBOC will probably continue repo operations and monetary policy will continue to be neutral-to-tight in the first two quarters.”

Conducting repos is “a hawkish move highlighting the central bank’s determination to tighten monetary policy via liquidity tools,” commented Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. The PBOC move indicated that “policy makers are uncomfortable with the recent decline in money-market rates and with the explosive growth of bank lending and other forms of social financing in January.”

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