China's central bank injected a net 365 billion yuan ($57.92 billion) into money markets this week, traders said, the largest weekly injection in history, as regulators struggle to maintain liquidity without producing inflation as forex inflows slow.
"It was a bit much," said a trader at a state-owned bank in Beijing, in reaction to the size of the injection.
"This means that there's no cut to (banks') reserve requirement ratios likely in the near term."
The injection was aimed at preventing a potential short-term liquidity crunch at commercial banks. Chinese banks need to sequester money both to meet central bank-mandated reserve requirements, measured at the end of the quarter, and also need cash to meet withdrawal requirements over the upcoming week-long holiday.
China used reverse repos to inject 290 billion yuan on Tuesday and 180 billion yuan on Thursday, offset by 107 billion yuan in maturing reverse repos, which drain liquidity.
For most of the last decade, the People's Bank of China (PBOC) was occupied with sterilizing inflows for foreign money, and it used open market operations primarily to drain liquidity from the system.
But as foreign investment into China - in particular speculative flows betting on the rise of the yuan - have abated, the bank has become a net supplier of cash to the market.
It has also increasingly turned to short-term precision tools, specifically reverse bond repurchase agreements with tenors between seven and 28 days, to keep liquidity stable.
Chinese regulators have struggled to balance the need to keep ample liquidity in the system against the fear that using longer term measures like reducing reserve requirement and loan-to-deposit ratios at banks would lead to a resurgence of inflation, misallocated investment and asset bubbles, which occurred in the aftermath of Beijing's stimulus package implemented during the global financial crisis.
The third round of monetary easing underway in the U.S., known as QE3, is already putting upward pressure on commodities prices, and Chinese regulators are also concerned by signs that real estate asset values are preparing to rise again.
The bank has conducted two separate massive liquidity injections this week, which pushed money rates sharply down in China's interbank market on Wednesday as cash flooded into the market.
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