Banking

PBOC further tightens liquidity to control inflation expectation

(Xinhua)
Updated: 2011-03-25 09:49

BEIJING - The People's Bank of China (PBOC), China's central bank, stepped up efforts this week to tighten excessive liquidity stemming from Chinese banks, as capital on the money market remains abundant throughout the country.

In its open market operations on Thursday, PBOC auctioned 47 billion yuan ($7.16 billion) of three-month bills and sold another 30 billion yuan of repurchase agreements. Also on Tuesday this week, PBOC issued 50 billion yuan one-year bills and sold 28-day repurchase agreements worth 85 billion yuan.

Offsetting the 109 billion yuan of bills and repurchase agreements that matured, PBOC took 103 billion yuan of liquidity out of the money market this week, compared to the previous week's tightening of 49 billion yuan.

Yield of three-month bills stood unchanged at 2.7944 percent from the previous week, while the interest rate of the 91-day repurchase agreements remained steady at 2.8 percent.

The central bank's further tightening followed PBOC's move last Friday to raise banks' reserve requirement ratios by 50 basis points, ordering China's major banks to keep a record high 20 percent of their deposits in reserve.

The new reserve requirement, effective as of Friday this week, will lock up another 360 billion yuan.

Analysts said the PBOC is determined to continue its control over the banking system's lending activities, as the central bank still faces enormous pressure to squeeze capital from the banks amid lingering inflation expectations.

"Though new loans fell significantly in February, the rapid growth of funds outstanding for foreign exchange is hard to reverse within a short period of time," said E Yongjian, an analyst for the Financial Research Center with the Bank of Communications.

Chinese banks made lower-than-expected new yuan-denominated loans of 535.6 billion yuan in February, or 192.9 billion yuan less than February last year.

China's funds outstanding for foreign exchange, however, rose 24.4 percent month on month to 23.08 trillion yuan at the end of January after the PBOC bought 501.65 billion yuan in foreign exchange from commercial banks during the month under the introduction of a mechanism to keep the exchange rate stable.

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Bills and repurchase agreements that mature in March and April both exceed 600 billion yuan, adding to the central bank's pressure to mop up liquidity from the market.

Zhuang Jian, a senior economist with the Asian Development Bank, said controlling liquidity of the money market is key to curbing price levels and he foresaw little room for the central bank to loosen its macro control at any time soon.

Judging from trends at home and abroad, China still faces a rigid inflation situation since the inflation expectation remains high in the first half of this year," Zhuang said.

China's consumer price index, a main gauge of inflation, rose 4.9percent in February from the same period last year, which was the same as the January CPI figure.