China's central bank will use short-term instruments issued via normal open market operations to offset the overabundance of liquidity circulating in the country's money market following January's record net foreign exchange purchase, Yi Gang, deputy governor of the People's Bank of China (PBOC), said Wednesday.
The PBOC and other domestic financial institutions bought a net 683.66 billion yuan ($138.94 billion) worth of foreign exchange in January, according to data released Tuesday from the central bank, the largest monthly net purchase ever and well above the total net purchase of 494.65 billion yuan recorded over the whole of 2012.
To mop up this cash, the central bank will rely on forward repurchase agreements (repos) and central bills, Yi said on the sidelines of the two sessions in Beijing. China has already been draining market capital via forward repos offered during normal open market operations since February 19, a development which followed nearly eight straight months of continuous reverse repo use. The central bank is expected to launch further repos Thursday after querying demand for 14-day and 28-day repos Wednesday, according to the China Securities Journal.
Liquidity conditions loosened in China after the country recorded large net buys of foreign currency in December and January. December's net purchase reached 134.6 billion yuan, last year's second highest monthly total, PBC data show. The recent buying surge came after the country's foreign currency balance remained relatively low throughout much of 2012, with April, July and August witnessing net sales.
Foreign exchange purchases in December and January were largely influenced by views that the yuan would appreciate on the back of improving outlooks on China's economy, Lu Zhengwei, a Shanghai-based economist with Industrial Bank Co, told the Global Times.
"Expectations that the yuan would depreciate, which lasted for most of last year, began changing around October and then the market waited one or two months to confirm that the currency was likely to strengthen in the near future," Lu explained.
"So in December and January, citizens and companies showed an increasing willingness to sell their foreign currency for yuan, driving up China's foreign exchange purchase as a result," he explained.
China's commercial banks bought $92.6 billion more in foreign currency than they sold to clients in January, the highest monthly total in a decade, according to statistics from the State Administration of Foreign Exchange, indicating robust demand for the yuan, Lu said.
Lu noted however, that China is unlikely to see the same sort of hefty net purchases of foreign currency in the year ahead. "The market's expectations of the yuan's movements could change at any time if the US dollar strengthens or if China's economy is seen weakening," he said.
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