Central Bank Resumes Net Withdrawals as Overnight Rate Gains Abate

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The People’s Bank of China is switching off the liquidity spigot as short-term interest rates    begin to decline.

On 3 August PBOC’s open market office announced that it will undertake 60 billion yuan in 7-day repo agreements that day, while suspending 14-day and 28-day agreements.

PBOC’s actions resulted in the first net liquidity reduction after multiple trading days, with 80 billion in repo agreements maturing on the same date, for a 20 billion yuan contraction.

On the same date the overnight SHIBOR also fell for the first time in many trading days,  declining 0.025 percentage points to 2.8070%, attesting to easing concerns over liquidity constraints.

PBOC’s instruments worth 1.3975 trillion yuan are scheduled to mature this month, which could potentially put further pressure on liquidity. 910 billion yuan in repos will mature in early August, followed by 287.5 billion medium-term lending facilities on 15 August.

With China’s ongoing deleveraging campaign beginning to show results, domestic analysts expect PBOC to keep market liquidity stable in the near-term.

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