Central bank continues longer-tenor cash injection

BEIJING - China's central bank has injected cash into the inter-bank market through a longer-than-usual market operation for three consecutive days, leaving analysts divided over policy makers' intentions.

The People's Bank of China (PBOC) on Friday conducted 50 billion yuan ($7.5 billion) of 14-day reverse repurchase agreements, a process in which central banks purchase securities from banks with an agreement to resell them in the future.

It followed 80 billion yuan of 14-day reverse repurchases on Thursday and 50 billion yuan on Wednesday, when the PBOC restarted such operations for the first time since February.

All three injections were priced to yield 2.4 percent, higher than for seven-day reverse repurchases, according to the PBOC.

The central bank has typically used 14-day reverse repurchases ahead of the Chinese New Year or National Day to ease temporary cash strains during the long holidays. At other times, it frequently uses seven-day reverse repurchases.

Some analysts believe the change was aimed at tightening short-term liquidity and deleveraging a bullish bond market, while others view it as a move to supplement long-term liquidity and stabilize the money supply.

Despite a cash strain in the overnight inter-bank market, the central bank refrained from a large-scale injection, but extended the tenor of reverse repurchases instead, reducing market expectations for monetary loosening, CIB Research said in a note.

The move will lead to higher financing costs for banking institutions as the short-term money strain remains unaddressed, it said.

Due to worries over a lack of short-term funds, much of which has gone to the country's bullish bond market, China's 10-year treasury bond futures posted their biggest daily drop in three months on Wednesday.

However, Shenwan Hongyuan Securities saw the move as a way to diversify monetary tools and to provide steadier cash flow instead of as a signal for monetary tightening.

The volume and pricing of the reverse repurchases show the central bank maintains a neutral monetary policy stance, according to a CITIC Securities report.

It predicted the PBOC will continue to ensure moderate liquidity in the market, though large-scale loosening is unlikely.

In Friday's interbank market, the benchmark overnight Shanghai Interbank Offered Rate, which measures the cost at which Chinese banks lend to each other, stood at 2.044 percent, unchanged from Thursday but higher than the 2.043 percent on Wednesday and 2.023 percent a week ago.