PBOC pulls back from further liquidity injection

China's central bank abstained from injecting more liquidity into the market via its routine open market operations on Thursday, indicating a desire to maintain relatively tight monetary policy while avoiding a new cash crunch, analysts said.

The People's Bank of China (PBOC) normally injects money via seven-day reverse repurchase (repo) agreements on Tuesdays and 14-day reverse repos on Thursdays, but it did not use this tool on Thursday.

"The absence of reverse repo [agreements] by the central bank on Thursday will not have a major impact on the short-term interbank rates," Gao Yang, a bond trader at China Guangfa Bank, told the Global Times on Thursday.

The central bank's recent moves signal that it will not allow the interbank rate to rise as much as it did in June, but the PBC will keep a tight overall monetary policy, Gao said.

The Shanghai Interbank Offered Rate (Shibor), a measure of the rate at which banks lend to each other, dipped on Thursday, with the overnight and seven-day rates falling to 4.001 and 5.329 percent respectively, from 4.05 and 5.616 percent on Wednesday.

Short-term money market rates eased from a six-month peak following the PBOC's injection of 29 billion yuan ($4.75 billion) via a seven-day reverse repo on Tuesday.

The PBC also said on December 19 that it had released 300 billion yuan through short-term liquidity operations in an effort to ease the tight liquidity.

Another reason for the fall in short-term rates was the corporate tax refunds, also known as fiscal deposits, given to commercial banks by the Ministry of Finance, traders said.

Missing one session of reverse repo agreements on Thursday shows the PBC's desire to see the response of the money market to the fiscal deposits, Gao said.

However, longer-term interbank rates with a duration of three months to one year continued to edge up on Thursday, reaching the highest point since June when a cash crunch rattled the market.

The longer-term money market rates are at a higher level because of large demand for cash expected before the Chinese New Year, which falls on January 31, 2014, a Shanghai-based bond trader who wished to remain anonymous, told the Global Times on Thursday.

Higher longer-term money market rates will eventually be passed on to the economy by driving up bond rates, meaning that bond issuers will have to offer higher yields, he said.