PBOC moves confuse fine-tuning speculation
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Xinhua, November 18, 2011
The People's Bank of China (PBOC), the country's central bank, on Thursday mildly surprised traders by ceasing liquidity injection in open market operations amid speculations that a selective loosening in policy is imminent.
Completing its open market operations this week, the PBOC auctioned 6 billion yuan ($944 million) of three-month bills at an unchanged yield of 3.1618 percent on Thursday.
The yield of the three-month bills was closely monitored by the market looking for any signal of the PBOC's possible policy fine-tuning after the central bank lowered the yield of 52 billion yuan of one-year bills it sold on Tuesday by 8.58 basis points to 3.4875 percent.
It was the first time since mid-August that the PBOC kept the one-year bill yield below that for the benchmark one-year deposit, a signal the market interpreted as part of the evidence supporting the argument that the PBOC is moving closer to partially loosening the credit policy.
After hedging 56 billion yuan worth of due bills and repurchase agreements, the PBOC drained 2 billion yuan of liquidity from the money market this week after two preceding weeks of net injections totalling 163 billion yuan.
The PBOC's liquidity drainage moves on Thursday, however, were not in line with the market's expectation about a coming loosening.
On Wednesday, the PBOC reiterated in its third-quarter policy report that it will "fine-tune" the prudent monetary policy when the time is right according to economic developments.
Equity markets in China reacted mildly, with the benchmark Shanghai Composite Index dropping 0.16 percent to close at 2,463.05 points and the Shenzhen Component Index losing 0.1 percent to 10,303.16.
Lu Zhengwei, an economist with the Industrial Bank Co Ltd, said rising demands in the bond market will drag down the yields on bills and other bond products.
"If the PBOC does not lower the yield, more demands will be encouraged, forcing the central bank to drain excess liquidity. That scenario in the end will tighten the liquidity condition in the market," Lu said.
Apart from its open market operations, the central bank can resort to other policy tools, such as adjustments in the bank reserve requirement ratio (RRR) or the interest rate, which will have a broader and more direct impact on the economy.
For example, the PBOC could lower the RRR to allow banks to have more money to lend, and vice versa. Or it can slash the interest rate to encourage more lending.
On the money market, the Shanghai Interbank Offered Rate (Shibor), which measures the cost for banks to borrow from one another as a key barometer of liquidity, all rose on Thursday.
The overnight Shibor jumped 30.42 basis points to 3.2292 percent, while the Shibor of one-week, two-week and one-month terms climbed by 20.75 basis points, 28.1 basis points and 24.69 basis points, to 3.5525 percent, 3.665 percent, and 4.8814 percent, respectively.
As the PBOC carefully said "fine-tuning," any monetary policy change will be slight, and a sharp turn is unlikely soon, Lu said.
He said he saw no correlation between a central bank bill rise and an imminent interest rate hike, or vice versa.
"I'm not saying the PBOC won't lower the interest rate in the future, but it takes time because it will be a process of gradually adjusting the policy," he added.
