December 14, The People’s Bank of China, or central bank, has enhanced its open market operations after it cut the required reserve ratio (RRR) for the first time in 3 years on Dec. 5, the official Shanghai Securities News reported on Wednesday.

The central bank drained RMB 73 billion ($11.5 billion) on Tuesday through the sale of RMB 38 billion of 1-year bills and RMB 35 billion of 28-day repurchase agreements, the paper said.

This week a total of RMB 13 billion worth of bills and repos is expected to mature.

The strengthening of the central bank’s withdrawal efforts started last week after it lowered financial institutions’ RRR by 0.5 percentage point on Dec. 5.

In the week ending Dec. 11, the central bank drained net RMB 101 billion through open market operations, the largest amount in a single week since mid-May.

The central bank’s latest moves were to maintain the relative balance of capital markets and send signals of a steady fine-tuning policy rather than proactive tightening, the paper said.

According to insiders, the 0.5 pp cut in RRR will release RMB 400 billion into the market. After the RRR reduction, the overnight yield on the interbank repurchase market fell from 3.4% to 2.86% in 3 trading days and the yield of 1-year bills fell by 13 bps below the 1-year deposit rate, the paper said.

After the central bank enhanced withdrawal efforts and left the coupon rate of 1-year bills unchanged, the yield in the money market stopped sliding and the difference between 1-year bills and 1-year deposit rates narrowed to within 5 bps on the secondary market, the report said.

Given the current situation, the central bank’s net withdrawal has not interfered with the supply of funds on the interbank market, the paper said.

Entering this week, overnight yields were steady around 2.95%. The yield of funds above 21 days rose due to seasonal (New Year) factors, but a number of joint-equity and city commercial banks are willing to lend, the paper said.

Source:21cbh.com