Central bank starts $4.8b repurchase operation

BEIJING - The People's Bank of China (PBOC) on Tuesday started a 28-day repurchase operation worth 30 billion yuan (4.8 billion U.S. dollars) for the first time since June, according to a statement on its website.

A repurchase operation is a central bank operation to withdraw funds in the open market to prevent rampant liquidity.

Chinese stocks dived on Tuesday, with the benchmark Shanghai Composite Index plunging 1.6 percent on the heels of the central bank's move.

The PBOC started the repurchase operation shortly after the seven-day Spring Festival holiday, in a bid to address the potential for excessive liquidity and a rapid increase in foreign exchange among financial institutions, analysts said.

Zhou Jingtong, a PBOC researcher, said the surge in China's exports is likely to greatly increase the funds outstanding for foreign exchange, calling for the PBOC's repurchase operation.

The country's exports surged 25 percent year on year in January, marking the fastest pace since April 2011 and up from the 14.1 percent rise in December 2012.

Meanwhile, the PBOC also suspended the offering of reverse repurchase (repo) agreements for the first time in the past eight months.

The PBOC provided a huge reverse repo worth a total of 860 billion yuan in the week ahead of the Chinese Lunar New Year, which fell on February 10 this year. It recorded a record-high fund injection in a single week, which guaranteed liquidity during the holiday in case money market rates skyrocketed on rising cash demand.

Analysts also said the repurchase operation is not a signal that the central government is changing the monetary policy, as this would require more observation.

Lu Zhengwei, chief economist with Industrial Bank, also said he believes the operation is an annual routine around the Spring Festival and does not signal a tightening monetary policy.