Despite the large volume of central bank repos set to mature by the start of September, market liquidity is expected to remain stable in the near-term as China’s fiscal expenditures see an increase towards the end of August.
The maturation of 560 billion yuan in People’s Bank of China repos in the final week of August has triggered concerns on the market about a potential tightening of liquidity in by the start of next month.
On Monday, however, PBOC’s open market office said that end-of-month fiscal expenditures would serve to significantly offset maturing central bank repos, serving to maintain the fundamental stability of liquidity within the banking system.
On the same date PBOC undertook 100 billion yuan in repos via yield auctions, coinciding with the maturation of 200 billion yuan in repos for a net withdrawal of 100 billion yuan.
CSC Financial analyst Huang Wentao said to Caixin that fiscal expenditures in tandem with the cash management commercial bank term deposit operations of local governments and shifts in the statutory reserves of financial institutions have prompted the central bank to shift towards net withdrawals via open market operations.
According to Huang excess reserve ratios at the banks currently remain at low levels across China’s banking system, leading to a lack of flexibility in funds.
With PBOC implementing a tightly balanced monetary policy, funds are “easy to constrict and difficult to loosen,” and a large-scale decline in rates is unlikely.
Li Huiyong, chief economist for Shenwan Hongyuan, said that August has thus far seen a net withdrawal of 280 billion yuan in liquidity, with PBOC seeking to maintain stability of the money supply by “slicing the peaks.”
According to Li this “tightly balanced” monetary policy is set to remain unchanged for the time being.
On 29 August short-term interbank rates saw modest declines, with the overnight SHIBOR falling 0.004 percentage points to 2.8479%, the 7 day SHIBOR falling 0.0034 percentage points to 2.9064%, and the remaining longer term rates all posting increases.