SHANGHAI, May 8: China’s central bank may be preparing to change the way it manages monetary policy by reintroducing bills as a liquidity management tool for the first time since 2011, dealers said, as the country struggles to keep rising capital inflows at bay.
The People’s Bank of China (PBOC) routinely asks primary dealers in the country’s interbank market about demand for various money instruments, and this morning the central bank surveyed demand for 3-month bills, dealers said. That suggests it might begin issuing such instruments during upcoming open market operations on Thursday.
China’s economic managers are struggling to maintain an economic recovery that remains anemic without fuelling asset bubbles by making money too cheap. Recent economic data has concerned economists as it shows signs that funds have once again begun to flow into speculative channels, as opposed to targeting the real economy. Steadily rising real estate prices have been of particular concern.
‘Capital inflows driven by aggressive easing by global central banks point to the need for the central bank to use bill issuance to help mop up excessive liquidity,’ said a trader at a Chinese commercial bank in Shanghai.
A Reuters estimate of hot money flows based on official data indicates that $181 billion in speculative cash entered China in the first quarter, fuelled by loose monetary policy from the United States and Europe.
(GRAPHIC:http://link.Reuters.Com/raz74t)
The central bank has not issued bills since late 2011, instead relying primarily on shorter-term bond repurchase agreements to manage the short-term money supply in the market. This has allowed the bank to quickly move money in and out of the market on a week-by-week basis without making longer-term adjustments that might pose a risk to growth.
But in order to counter the speculative inflows betting on yuan appreciation, the central bank has begun to intervene in the currency market, buying up foreign exchange in exchange for yuan. This yuan has become a source of liquidity in the interbank market.
‘If the PBOC really does resume bill issuance, it will be primarily to target hot money inflows,’ said Liu Junyu, bond and money market analyst at China Merchants Bank in Shenzhen.
While the change would impact liquidity in the interbank market, it does not necessarily signal an overall monetary tightening is in the works, he said.
‘Given so much weak economic data and recent dubious trade data, the PBOC will probably keep monetary policy unchanged and neutral,’ he said. He added that the PBOC routinely surveys the market for demand for 91-day forward repos, which would have the same effect as three-month bills, but has rarely issued them.
Telephone calls to the PBOC requesting comment were not answered.
The central bank relied mostly on reverse repos in 2012, which inject liquidity into the system for a period between seven and 28 days, but in 2013 it began to drain funds, soaking up a combined 638 billion yuan ($104 billion) from the money market via its regular open market operations from the start of this year to last week.
In mid-February, the bank switched to relying on 28-day forward repos which drain funds. This change roiled China’s money and equity markets as investors felt it portended that a wider monetary tightening was getting under way.
Equity markets and short-term money market rates showed little reaction to the news.
($1=6.146 Yuan)
(AGENCIES)
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