China Central Bank Liquidates Cash Worth USD 141B in Open Markets

China's central bank made its largest weekly cash withdrawal in more than two months this week, following a loosening of liquidity conditions at the start of the month, at a time when some market participants anticipate a reduction in banks' reserve requirements in the near future.

According to calculations based on official data, the People's Bank of China (PBOC) drained a net 983 billion yuan ($141.09 billion) through reverse repurchase agreements in open market operations this week.

The weekly net cash withdrawal, the biggest since the first week of this year, marked the fourth straight week that the PBOC took short-term money out of the banking system.

The PBOC's latest move appeared to have little impact on markets, with the volume-weighted average rate of the benchmark seven-day repo trading in the interbank market standing at 2.0104 percent around midday, close to the PBOC's official reserve repo rate for the same tenor of 2%.

Analysts expect the PBOC to maintain its broadly accommodative stance this year to support the nascent economic recovery, but mixed data in the first few months of the year has sparked market speculation about whether its next move will be cautious tightening or further easing.

"The central bank is very likely to use open market operations to control market rates around policy rate levels," said Ming Ming, chief economist at Citic Securities.

He believes the PBOC will instead reduce the amount of cash banks must set aside in the first quarter.

Such market expectations arose after the central bank's governor, Yi Gang, stated last week that using the reserve requirement ratio (RRR) to release long-term liquidity remains an effective tool for assisting economic recovery.

"The PBOC will continue to provide sufficient liquidity to support credit growth," said Commerzbank's Tommy Wu, senior China economist.

"The central bank could accomplish this by lowering the RRR. It may also influence benchmark bank lending rates, known as loan prime rates (LPRs), to be lower in order to reduce the interest burden on households and businesses."

On March 20, China will release its monthly LPR fixing.