SHANGHAI: China's central bank drained cash from the money market this week, after a small injection last week, as it continued to confront a large amount of money flowing into the interbank market.
Stable auction yields on central bank bills this week indicated the People's Bank of China (PBOC) has no intention of raising official interest rates in the near future again after a rise last week, traders said.
However, the PBOC will likely raise the required reserve ratio for banks again sometime soon, a number of traders said, because of abundant money market liquidity that some say appears to be at least in part the result of inflows of capital from overseas.
The central bank is using its open market operations mainly to offset the hundreds of billions of Yuan in maturing bills and repos in April, they said, and would raise banks' required reserves if faced with too much cash flowing into the money market from other sources that could contribute to inflation.
"The PBOC is draining based on how many bills and repos are maturing, so you have to look at foreign inflows and the loan situation to determine when they will raise the required reserve ratio," said a trader with a Chinese commercial bank in Shanghai.
The PBOC drained a net 83 billion Yuan ($12.7 billion) through its regular open market operations this week, returning to drains after injecting 28 billion Yuan last week.
Still, liquidity remains abundant, as shown by the fact that money market rates are now as low as they were before the current tightening cycle started in October, since which time the PBOC has raised required reserves six times and benchmark interest rates four times.
Supporting the idea that the time may be ripe for yet another reserve ratio hike, the official China Securities Journal said in a front-page editorial on Thursday that the PBOC was likely to raise reserve requirements in the near term to soak up excessive liquidity in the money market.
Foreign capital inflows are a challenge for the authorities in managing cash flowing into the money market, the newspaper added. Timely data on such inflows is unavailable; making it difficult to estimate how much money is flowing in from the outside.
Authorities' main aim in combating excess liquidity is to keep already high inflation from getting out of hand.
March inflation, figures for which are due out on Friday, is expected to reach a 32-month high of 5.2 percent, accelerating from 4.9 percent in February, according to a Reuters poll.
However, some analysts and market participants see the room for further rises in required reserves as limited, considering the ratio for big banks is already at a record high of 20 percent.
"There is still a little space for the PBOC to raise the reserve ratio again. But I personally think there isn't much space for it to raise the reserve requirement ratio higher than another 0.5 or 1 percentage point," said a trader with a state-owned commercial bank in Shanghai.
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