Regulation, monetary cocktail to keep liquidity stable

The mutually reinforcing relationship between financial regulation and monetary cocktail will keep China's liquidity basically stable in months ahead, according to analysts.

After a three-day suspension of reverse repos, the central bank renewed cash injections Wednesday as liquidity pressure increased as 190 billion yuan (about 27.5 billion U.S. dollars) of previous reverse repos matured.

The People's Bank of China (PBOC) conducted 110 billion yuan of reverse repos and pumped 47.6 billion yuan into the market through pledged supplementary lending (PSL), a tool designed which helps the central bank target longer-term rates.

Purchases of short-dated maturities have remained the central bank's main method of stabilizing liquidity, and Wednesday's operations included 90 billion yuan of seven-day reverse repos priced to yield 2.45 percent; 10 billion yuan of 14-day contracts with a yield of 2.6 percent; and 10 billion yuan of 28-day agreements with a yield of 2.75 percent.

Despite the injections, the money market witnessed a net cash withdrawal Wednesday, showing the central bank's intention of tightening things up, at least in the short term.

"The withdrawal can be explained by the recent calmness of inter-bank and exchanging markets," said Chen Yi, researcher with Bank of Communications.

On Thursday, the central bank injected 20 billion yuan of new money, with 80 billion yuan of reverse repos offset by the maturation of another 60 billion yuan.

Capital prices then fell, overnight Shanghai Interbank Offered Rate (Shibor) by 1.4 basis points to 2.8130 percent.

However, the yield of ten-year treasury bonds rose to 3.7 percent on Thursday.

Bond buyers have been increasingly pessimistic since last year, due to tightened regulation. Yields have climbed because of weak sentiment and tight regulation, according to a research report by Guosen Securities.

"Looking ahead, financial regulation and liquidity control will complement each other, and liquidity will remain basically stable in the coming months," said Chen, adding that short-term inter-bank borrowing costs have only a slim chance of exceeding four percent.