* C.bank drains record 910 billion yuan through open mkt ops
* But FX purchases, bank deposit inflows add liquidity
* C.bank repo rates show little sign of tightening bias
* Monetary policy aimed at broader economy, not real estate
By Gabriel Wildau
SHANGHAI, Feb 21 China's money rates tiptoed
higher on Thursday after the central bank completed its largest
weekly net fund drain on record, triggering speculation that
monetary policy may tighten in the weeks ahead.
But interbank funding conditions remain relatively loose,
however, and traders say the central bank's action this week is
aimed mainly at counteracting liquidity inflow from other
sources and doesn't signal a hawkish stance.
The benchmark weighted-average seven-day repo rate
was at 3.0 percent near midday, up five basis
points from Wednesday's close. Traders generally regard the
three percent threshold as signaling loose conditions.
The overnight repo rate rose 14 basis points
to 2.03 percent - still very low by historic standards.
Cash that flowed out of the banking system ahead of the
Lunar New Year is now returning in droves, traders say. Strong
export growth and yuan appreciation pressure have also boosted
foreign exchange purchases by the central bank. Such purchases
expand the base money supply.
The record-high fund drain via open market operations this
week is mainly the result of the record-high injection that the
central bank conducted prior to the holidays.
Some 860 billion yuan in 14-day reverse repos issued early
this month matured this week, draining funds. Standard repos
issued this week added only 50 billion yuan to the total drain.
Prior to this week, the People's Bank of China had not
issued any standard repos since June last year. The
re-introduction of this instrument, and especially the 10
billion yuan in longer-term 91-day repos issued on Thursday,
caused some analysts to conclude that the PBOC had turned
"Re-introduction of a longer-dated, 3M draining operation
suggests a hawkish bias as it means removing liquidity for a
more extended time," Dariusz Kowalczyk, senior Asia economist at
Credit Agricole in Hong Kong.
China's CSI300 index, which tracks the country's
largest listed firms, slid more than 3 percent on Thursday on
concerns that the recent central bank behavior signalled the
beginning of a tightening cycle.
Investors were worried that the central bank was draining
funds more aggressively than expected, said Chen Shaodan,
analyst at New Times Securities, which she said had sparked
worries that a sustained drain on liquidity is in the offing,
depressing stock prices.
But the interest rates on the PBOC's repo operations
suggests that authorities are not actively guiding rates higher.
The 28-day day repos issued on Thursday carried a rate of
only 2.75 percent, compared to the current
one-month interbank repo rate of 3.23 percent. The
PBOC issued its 91-day repos at 3.05 percent,
below the market rate of 3.55 percent.
A statement by the outgoing Premier Wen Jiabao that cities
experiencing rapid home price rises should impose new measures
to restrain prices has also fueled the concern that monetary
policy may soon tighten.
But traders point out that monetary policy isn't the
government's primary tool for influencing the property market,
and there is still scant evidence of inflationary pressure in
the broader economy.
"With CPI still well below three percent, you can't really
say that inflation is a big threat," said an interest-rate swaps
trader at a joint-stock bank in Shanghai.
China's CPI was 2 percent in January, though the
impact of the Lunar New Year holiday may have distorted the
With the economy recovery still somewhat uncertain, the PBOC
will refrain from aggressive tightening measures unless basic
material prices begin to rise, the trader said.
Current Prev close Change
7-day repo 2.9988 2.9488 +5.00
7-day SHIBOR 2.9980 2.9490 +4.90
Note: Repo rate is weighted average.
- Monetary policy to be neutral in 2013
- External liquidity tracker: Open market operations and
fiscal deposits are the main sources of liquidity in recent
months GRAPHIC: r.reuters.com/das95t
- Impact of maturing central bank bills and repos GRAPHIC: r.reuters.com/kas95t
- China's interest-rate swap curve has steepened GRAPHIC: r.reuters.com/has95t
- China's government bond yield curve has steepened GRAPHIC:
- China corporate bond spreads have narrowed slightly
- Hot money tracker: Hot outflows may be reducing liquidity,
but the impact is small GRAPHIC: r.reuters.com/was95t
(Editing by Sanjeev Miglani)