PBOC injecting cash via open market operations

Chief economist at the research bureau of the People's Bank of China (PBOC) Ma Jun.
Chief economist at the research bureau of the People's Bank of China (PBOC) Ma Jun. PHOTO: BLOOMBERG

Central bank opts for new tools instead of cutting required reserve ratio for big lenders

BEIJING • China's central bank is using new tools to step up cash injections with open market operations instead of cutting the required reserve ratio (RRR) for big lenders.

Mr Ma Jun, chief economist at its research bureau, yesterday said the People's Bank of China (PBOC) has added liquidity support through three channels as an alternative to cutting the RRR for major lenders.

The PBOC's recent liquidity support is acting as a "substitute for a RRR cut", Mr Ma, who is not in a policymaking role, told the state-run China Central Television (CCTV).

The cash injections come as slower economic growth spurs capital outflows and amid a seasonal rise in demand for cash ahead of the week-long Chinese New Year holiday, which starts next month.

China on Tuesday said fourth- quarter gross domestic product growth slowed to 6.8 per cent, while industrial production, retail sales and fixed asset investment growth all slowed at the end of 2015.

The liquidity injections reduce the likelihood of a RRR cut in the short to medium term as the coming liquidity supply is equivalent to a RRR reduction, Mr Zhao Yang, chief China economist at Nomura in Hong Kong, wrote in a report.

The PBOC may be preferring market-based ways of adding funds as it retools its monetary policy framework and seeks to avoid further yuan depreciation expectations.

Money market conditions remained tight yesterday despite the PBOC injections.

China's 14-day money market rate jumped the most since June as capital outflows and cash hoarding ahead of Chinese New Year outweighed central bank injections. The Shanghai Composite Index closed 1.03 per cent lower.

The cash injections will play a positive role in helping to stabilise market expectations and interest rates, Mr Ma told CCTV. He cited three PBOC liquidity tools: medium-term lending facility (MLF), standing lending facility and pledged supplementary lending.

The PBOC may want to avoid using a broad policy tool like RRR because it may further depress the yuan, said Citic Securities' head of fixed income research Ming Ming, who formerly worked in the PBOC's monetary policy division. The yuan fell to a five-year low last week and is down almost 6 per cent over the past year.

The PBOC has announced almost 900 billion yuan (S$197 billion) worth of injections via the avenues and reverse repurchase agreements since last Thursday, with almost half of that concentrated in a 410 billion yuan MLF operation, according to Bloomberg calculations.

"This clearly points to further easing bias in China's monetary policy, especially after the weak GDP figures," said Mr Zhou Hao, an economist at Commerzbank in Singapore.


A version of this article appeared in the print edition of The Straits Times on January 21, 2016, with the headline 'PBOC injecting cash via open market operations'. Print Edition | Subscribe