PBOC`s reverse repurchase stirs more RRR cut expectation

BY lIYUCHUAN | FROM CSJ | 2012-06-27 10:48
CSJ--Wednesday, June 27, 2012
People's Bank of China (PBOC), or the central bank, launched a third round of reverse repurchase (repo) operations worth 95 billion yuan (15.08 billion U.S. dollars) on Tuesday, aiming to ease the market squeeze and buoy weaker-than-expected economic growth.
The 14-day repo operations came after the central bank conducted so in January and May, injecting at least 400 billion yuan of liquidity into market.
The latest move meant the banking liquidity remained tight and the world's second-largest economy needed a cash injection to boost its slower-than-expected growth, analysts said.
Analysts said market liquidity is to some extent decided by the amount of yuan funds outstanding for foreign exchange, which represented the yuan funds that that PBOC had to inject into the market to offset the same amount of foreign exchange inflow from trade surplus and overseas speculative money, as yuan remained inconvertible under the capital account.
If open market operations fail to ease the tight money supply, analysts expect the PBOC will lower the bank's Reserve Requirement Ratio (RRR) further, and the monetary policy might shift from prudent to relatively easy.
Nearly a third of respondents to a recent survey of Chinese bankers said they believed the monetary policy would be eased, an increase of 25 basis points.
The PBOC has lowered the RRR twice this year, releasing at least 800 billion yuan of liquidity. It also cut lending and deposit rates to spur growth, the first such move in nearly three years.
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