China central bank says to halt bill sales to inject cash

SHANGHAI: China's central bank said on Friday it would suspend bill sales until after the end of the Lunar New Year in late January to help inject cash into money markets, fueling expectations that it could be planning to cut banks' required reserves again as the economy slows.

The People's Bank of China (PBOC) said in a brief statement that in addition to halting bill sales until after the week-long holiday that runs the week of Jan. 23, it could also conduct reverse repo business to help inject money into the market if necessary.

That ensures that the PBOC will inject at least 125 billion yuan ($19.8 billion) into the financial system from the start of January through the Lunar New Year -- the amount of bills and repos due to mature during that time.

It is doing so to alleviate the cash crunch that normally happens in the run-up to the holiday as businesses and individuals withdraw cash to pay year-end bonuses and remit their earnings to their families.

But with money market rates remaining elevated, analysts say the PBOC might need to do even more if it wants to ease the liquidity situation, with one possibility being another cut in banks reserve requirement ratio after the first such cut last November.

"Previously the central bank rarely made such statements until they actually suspended the bill sale or conducted the reverse repo business," said Li Jieming, bond and money market analyst at Sealand Securities in Shenzhen.

"This means the central bank wants to send a strong signal to help the market to weather the current liquidity squeeze. I expect an RRR cut could be announced as early as late Friday. As such a cut needs about one week to take effect, a later announcement than Friday may be too late to inject money into the market."

Analysts widely expect the central bank to carry out further cuts in required reserves early this year, after it announced the first such move on Nov. 30, reversing a steady rise in the reserve ratio starting in late 2010 as part of its efforts to combat inflation.

However, earlier on Friday, rumours spread in the money market that the central bank had already conducted reverse repos to inject cash into the market, a move that traders said could delay a cut in reserves.

Analysts expect data due to be released in the next two weeks to show economic growth slowed in the fourth quarter, while inflation eased in December, which would give the PBOC further reason and leeway to let more cash flow back into the economy rather than being locked up with it.