- PBoC withdrew liquidity last week: "After eight consecutive weeks’ (since late May) liquidity injection, totaling Rmb957bn, the PBoC drained Rmb101bn of net liquidity from the market last week (Exhibit 1)."
- Light redemption pressures explained the net withdrawal: "The PBoC issued Rmb125 bn of bills (Rmb45 bn of 1-year bills last Tuesday and Rmb80 bn of 3-month bills last Thursday), substantially below the issuance (Rmb240 bn) of the week before last. Much
lighter redemption pressure (Rmb39 bn last week vs. Rmb190 bn in the week before last) resulted in a net liquidity withdrawal of Rmb86 bn from bill issuance last week (Exhibit 3). Meanwhile, the PBoC sold Rmb50 bn of 91-day repo. Given Rmb35 bn of matured repo, the
PBoC drained a further Rmb15 bn of liquidity from repo operations. The reference yields of 3-month and 1-year PBoC bills remained unchanged at 1.57% and 2.093%, respectively (Exhibit 4). Largely bound by the reference yield of the 3-month bill rate, the 91-day repo rate stayed constant at 1.57% as well (Exhibit 6)."
- Further easing liquidity: "Interbank liquidity has continued to ease, with the 1-month SHIBOR sliding to 2.301% from the recent peak at 4.053% (Exhibit 2). This noticeable correction may have reflected the following factors: 1) liquidity injection by the PBoC; 2) completion of mid-year inspection on loan/deposit ratio; and 3) possible return of capital inflows."
- What’s next: "Given the relatively light redemption pressures, the scale of bill issuance and repo sales should be modest in the coming weeks (Exhibit 7). In light of the improved market liquidity situation, we expect the PBoC to continue with mild liquidity drainage in coming weeks to help stabilize the money market rates."
Morgan Stanley China Economics 20100726
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