PBC injects cash to meet CNY demand

The People's Bank of China (PBC) Tuesday conducted a 14-day reverse-repurchase operation which saw a net 169 billion yuan (US$26.77 billion) injected into the market in advance of the week-long Chinese Lunar New Year holiday.

However, the injection was far from being enough to alleviate the credit squeeze in the run up to the holiday, and another huge reverse-repo will be conducted by the central bank tomorrow, according to an analysis by the Industrial Bank.

As such, the analysis said it expected further liquidity to be added in tomorrow's open market actions, to bring the net addition to around 400 billion yuan for the week, equivalent to a 50 basis points cut in the reserve requirement ratio.

During the first three weeks of January, a total of 125 billion yuan in bills and repos matured in the open market, which many analysts said will be insufficient to meet demand for cash stimulated by the holiday.

Many predictions have said that banks will need an extra 200 to 300 billion yuan to meet demand over the week-long holiday.

The PBC posted a notice on January 6 saying that, in order to ensure banking liquidity during the Chinese New Year, it would suspend the sale of bills and conduct short-term reverse-repo operations before the holiday.

"Traditionally, the weeks before and during the Lunar New Year have always been the peak demand for funds, as people spend more money as part of festivities," Chen Xuebin, deputy director of the Institute for Financial Studies at Fudan University, told the Global Times yesterday.

"More demand, in combination with a decreased amount in the base money supply by the central bank based on the dropping funds outstanding for foreign exchange during the fourth quarter of last year, has caused the current liquidity restraint," Chen added.

During the last quarter of 2011, China's funds outstanding for foreign exchange slipped 153 billion yuan quarter-on-quarter, which was caused by an outflow of speculative money from the Chinese mainland.

The seven-day Shanghai Interbank Offered Rate (SHIBOR) surged 182.67 basis points to 7.4117 percent yesterday, while the 14-day rate rocketed 140.50 basis points to 7.8267 percent.