Bank of China Resumes Repos to Drain Liquidity

To further drain liquidity from the country’s banking sector, China’s central bank on Thursday resumed the issuance of repurchase (repo) agreements, and analysts are interpreting recent small-scale open market operations as signs of a prudent monetary policy.

After suspending open market operations last Thursday and on Tuesday,the People’s Bank of China (PBOC) started another round of 28-day repos worth 5 billion yuan (796 million U.S. dollars) on Thursday, with the bid interest rate unchanged from previous repos, according to a PBOC statement.

Given the country’s steady economic growth, a global flood of liquidity and domestic inflationary pressure, China will carry out neutral currency controls while setting a prudent policy tone, said Lian Ping, chief economist with the Bank of Communications.

Lian said chances are slim that the monetary policy will be further eased or tightened.

On Feb. 19, the PBOC re-introduced 30 billion yuan in repos for the first time since June 2012, and it added another 5 billion of repos into the total drain on Feb. 26. The moves sparked speculation about future hawkish monetary control.

However, Zhou Xiaochuan, governor of the PBOC, on Friday attributed the repeated repos to “Spring Festival factors,” saying the central bank did it to drain liquidity that had been injected into the interbank market prior to the holiday via a huge reverse repo of 860 billion yuan.

Future liquidity adjustments have to be made based on economic data for the first two months, Zhou added.

via Xinhua

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