PBOC injects 700 billion yuan via reverse repo in five days, analysts say RRR cut basically unlikely this year

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Chinese central bank injected 700 billion yuan liquidity to the banking system via open market operations in five trading days. Analyst say the recent operations show that a cut in banks’ reserve requirement ratio (RRR) is basically unlikely this year.

The People’s Bank of China (PBOC) injected 200 billion yuan of liquidity to the banking system via 7-day reverse repurchase agreement on Tuesday, with interest rate unchanged at 2.2 per cent, while 10 billion yuan reverse repo expired on the day, leaving a net 190 billion yuan injection.

The cash injection is aimed to meet higher cash demand for a peak of tax payment and local government bond issuance, said the central bank.

That followed the same operation on Monday, when the PBOC injected a net 190 billion yuan liquidity, the biggest one-day cash injection since January 21. Before that, the central bank injects 100 billion yuan each day between October 20 – 22 and 200 billion yuan on October 25. Tuesday’s operation brought the central bank’s total net cash injection in five days to 700 billion yuan.

Analysts says the PBOC’s recent operations sharply lower the chance for a cut in banks’ reserve requirement ratio (RRR) in the remainder of this year.

In November, one trillion yuan of Medium-Term Lending Facility (MLF) loans will expire, the highest month-month volume this year.

China’s interbank lending rates are largely stable, indicating that short-term liquidity is reasonably ample, said Wen Bin, chief analyst at Minsheng Bank.

For the PBOC, the factors such as maturing of MLF loans, tax payment peak are just short-term fluctuations, said Wen. “The PBOC can smooth out the short-term fluctuations using open market operations. It seems a RRR cut is unlikely this year.”

He added that short-term constraints for the central bank to cut RRR include fast PPI growth and the tapering by the US Federal Reserve.

Ming Ming, chief fixed-income analyst at Citic Securities, said that the chance for a RRR cut before the end of this year is low, as “liquidity gap is not large, the PBOC’s frequent use of MLF loans and open market operations to maintain liquidity makes a RRR cut less necessary, and meanwhile, the economic conditions constrains monetary easing”.

“There isn’t a big liquidity gap in the fourth quarter and from the perspective of economic fundamentals, indicators for employment have improved significantly, which would be a key reason for the central bank not to cut RRR, said Jing Yi, chief fixed-income analyst at Sealand Securities.

Currently, liquidity in the domestic market remains reasonably ample, the monetary and credit condition largely match the recovery and the economy is operating within a reasonable range, said Zhou Maohua, macro analyst at Everbright Bank.

The problems the economy is facing right now are complex and can’t be solved by RRR cut, he added.

In addition, PBOC officials’ recent comments have also dampened market expectation for a RRR cut this year. Market believes that monetary policy will be maintained prudent in the future and the central bank will tend to use quantitive and structural tools to support the real economy.

Liquidity in China’s banking system will be basically balanced in the fourth quarter, with no big fluctuations and the PBOC will stick to normal monetary policy, which will be flexible, targeted and appropriate, Sun Guofeng, head of the central bank’s monetary policy department, said earlier this month.

The PBOC will use various tools to keep liquidity reasonably ample and enhance stability of total credit growth, he said.

“In the fourth quarter, supply and demand of liquidity in the banking system will continue to be basically balanced and there won’t be any big fluctuations,” Sun said.

In July, the PBOC cut the RRR for banks, releasing about 1 trillion yuan ($155 billion) in long-term liquidity. Until recently, most analysts had expected another RRR cut this year, though some still hold out that possibility.

The central bank will provide low-cost funds to financial institutions to support carbon emission reductions and help achieve the country’s carbon neutrality goals, Sun said.