(Yicai Global) Dec. 18 -- China's central bank injected funds into the money market again today after yesterday ending a 36-day pause, the longest on record.

The People's Bank of China conducted seven-day reverse repurchases totaling CNY340 billion (USD49.3 billion) over the last two days, including CNY180 billion today. As well as maintaining reasonably adequate liquidity in the banking system, yesterday's action aimed to offset a looming tax deadline, paybacks on treasury bonds and payments of required reserves by financial institutions, the monetary authority said in a statement.

A reverse repurchase is a transaction in which the PBOC sells a security to a counterpart and agrees to buy it back at a specified price and time. The disparity between the sale and repurchase prices is the interest the central bank pays. 

The DR001, or one-day pledged repo rate in the interbank market, opened at 2.55 percent, with the last day's weighted average price reported at 2.6482 percent; the DR007, or seven-day pledged repo rate, opened at 2.65 percent, with the last day's weighted average price at 2.6922 percent.

Liquidity in the banking system is generally reasonable and adequate, with a higher level available occasionally, while capital supply was ample during the period in which the PBOC refrained from reverse repos.

Seasonal Demand

Some analysts believe that seasonal effects are starting to appear, though bank liquidity is ample at present. Money demands tend to increase between the New Year's and Chinese Spring Festival holidays, with the one-month Shanghai Interbank Offered Rate, or Shibor, rising to its current 2.9 percent from 2.7 percent at the end of last month in a significant rise for two straight weeks. The overnight Shibor also rebounded greatly last week to a level closer to its one-week counterpart.

The Shibor is an unguaranteed, wholesale interest rate formulated by averaging all the interbank yuan lending rates offered by banks with high credit rating.

The medium and long-term Shibor have not greatly fluctuated, however. The PBOC's monetary regulation and control policies are more cautious before an expected increase in US Federal Reserve rates this month and other factors, narrowing the China-US spread.

Adequate Liquidity Goal

Maintaining reasonably adequate liquidity is still the target of the bank's open market operation. When the economy dips, slightly looser monetary conditions are needed, but these must factor in external equilibrium, PBOC Governor Yi Gang said on Dec. 13, adding this means it must not be too loose since an excessively low interest rate will impact the exchange rate. Intrinsic and extraneous equilibrium must strike a balance, he noted. 

A focus is also needed on the internal economic factors in external equilibrium during an economic downturn, Yi advised, as is a discovery of the optimal balance point.

The central bank is in the process of switching from primary dependence on quantitative controls to setting price curbs as its main means of economic regulation, he said.

In the course of these, the PBOC will adopt both quantitative and price controls, he said, adding that the latter are becoming increasingly important, more so than in previous years, but quantitative controls are also key because of fundamentals, mechanisms and popular mindsets.

Editor: Ben Armour