Central bank advises investors to focus on interest rates

Imaginechina

Investors shouldn't pay much attention to the number of the central bank’s open market operations, but should focus more on policy interest rate indicators, according to Financial News, an official media outlet affiliated to the People’s Bank of China (PBoC).

This year, PBoC injected 389.5 billion yuan (US$60.1 billion) in short-term liquidity for the Chinese New Year holiday, with 180 billion yuan via seven-day reverse repos, 250 billion yuan via 14-day reverse repos, while withdrew 40.5 billion yuan via net medium-term lending facility/targeted medium-term lending facility maturing.

A reverse repo is an important monetary policy tool used by the central bank to control liquidity and inflation. Through this open market operation, the central bank purchases securities from commercial banks via bidding, with an agreement to sell them back in the future.

Medium-term lending facility (MLF) is a measure to expand credit through which banks can borrow funds from the central bank at lower interest rates, while the targeted medium-term lending facility (TMLF) policy tool aims to support small and private businesses at lower costs by providing long-term funding for financial institutions.

The liquidity injection was significantly less than during the same period in previous years, as a majority of migrant workers stayed in their workplace cities — reducing cash demand — and the solid economic recovery and strong financial market performance over the past several months created a favorable backdrop for PBoC to taper its injections, according to Nomura global markets research.

The lower-than-usual liquidity injection prior to Spring Festival indicates the central bank's operation is becoming more precise, and the shorter operation period is conducive to timely withdrawals of funds after the holiday, according to Financial News.

The move proved effective as it helped avoid the changing nature of money market interest rates before and after Spring Festival. It also illustrates how the central bank focuses more on stabilizing interest rates in open market operations, and makes adjustments to specific operation quantity and policy tools based on cash conditions, fiscal revenue and market demand.

PBoC rolled over 200 billion yuan on Thursday in maturing MLF and net drained 260 billion yuan via OMOs. Today, it put 20 billion yuan into money markets through seven-day reverse repos.

Chinese markets experienced short-lived interbank market turmoil in late January, which quickly ended due to PBoC Governor Yi Gang’s pledge that supportive policies would not end prematurely, the central bank's immediate action to dismiss market rumors of a standing lending facility rate hike and stronger-than-expected aggregate financing data for January.