China’s central bank has sent a message to investors to focus more on money market interest rates rather than how it manages the amount of cash in the financial system, as speculation mounts that its unusual liquidity withdrawals around the Lunar New Year holiday signal a tightening of monetary policy.
The Financial News, a newspaper backed by the People’s Bank of China (PBOC), carried an opinion piece on its app on Thursday that was later published on the front page of the newspaper on Friday, emphasizing that the central bank’s focus was on keeping short-term benchmark interest rates steady and that liquidity injections and withdrawals were driven by market conditions and demand. The article was also posted on the central bank’s WeChat account on Thursday.
The newspaper often acts as a channel for the PBOC to communicate unofficially with the markets, and the article was widely interpreted as aimed at reassuring skittish investors that the central bank’s liquidity operations aren’t a sign that monetary policy is being tightened. PBOC officials have repeatedly said that there will be no sudden or sharp shifts in policy this year amid concerns that the economic recovery from the coronavirus pandemic isn’t yet on solid foundations.
“Now (market entities) should not focus too much on the size of the central bank’s (open market) operations (OMO), or they may misinterpret the (central bank’s) monetary policy stance,” the commentary (link in Chinese), penned by Li Guohui, said. Instead, they should focus on policy rates, including those on the medium-term lending facility, and other rates on instruments sold by the PBOC in OMO, the commentary said. OMO instruments include repurchase and reverse repurchase agreements conducted in the interbank market.
The PBOC traditionally injects hundreds of billions of yuan into the financial system before the Lunar New Year holiday to make sure there’s enough money to meet surging demand partly from companies paying year-end cash bonuses to workers and from individuals who use the break to go on a spending spree and send gifts of red envelopes stuffed with cash.
But this year, the central bank added far less cash and also refrained from cutting banks’ reserve requirement ratio (RRR), a liquidity tool that has often been used before the Lunar New Year in recent years to inject funding into the financial system. Some economists said (link in Chinese) the PBOC’s deviation from the norm had sowed confusing among investors about the direction of monetary policy. On Feb. 8, in its daily OMO statement (link in Chinese), the central bank explained why it was pumping in less liquidity, saying that demand for cash withdrawals was significantly lower than in previous years, while fiscal expenditure had increased considerably.
In the runup to the Lunar New Year, when markets close for the weeklong holiday, the PBOC injected 430 billion yuan ($66.6 billion) in short-term money…
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