November 26, 2018 / 4:53 AM / 9 months ago

China may have revived repos to drain liquidity in Oct - CSJ

SHANGHAI, Nov 26 (Reuters) - China’s central bank may have drained short-term funds from the banking system in late October by quietly reviving a tool to mop up excess liquidity, a state-run newspaper reported on Monday, citing analysts.

But the China Securities Journal said the possible re-launching of repo operations for the first time in years did not signal a shift in the central bank’s monetary policy stance.

Beijing has loosened monetary and fiscal policy conditions this year as it seeks to cushion the cooling economy and encourage more lending to private enterprises, with further growth boosting measures expected in coming months.

The People’s Bank of China has almost exclusively relied on reverse repurchase agreements, or reverse repos, to pump liquidity into the banking system in recent years.

But analysts quoted by the China Securities Journal said evidence suggested that the PBOC had recently used repurchase agreements, or repos, which withdraw liquidity.

“The central bank was likely guiding liquidity to a reasonably ample level by conducting repos,” the newspaper said.

It said the authorities may have judged that there was too much liquidity, rather than the PBOC’s targeted levels that it describes as “reasonable and ample”.

Through repo operations, the central bank sells already existing bonds to select banks to withdraw cash from the banking system and agrees to buy them back at a later date.

“If the central bank conducted repos in October, maturing in November, then that could explain why liquidity returned to being ample without any cash injections through open market operations and fiscal expenditures,” the newspaper said, adding maturing repos has already returned to the market.

Traders told Reuters on Friday that liquidity levels remained relatively loose despite the central bank making no net cash injections or withdrawals for an unprecedented third straight week.

A revival of repo operations “doesn’t mean the central bank will tighten its monetary policy... Current monetary policy does not have a basis for obvious tightening,” the official paper said.

The last time the central bank conducted general repo operations was in November 2014, and it conducted some targeted repos in 2015.

The central bank has yet to respond to faxed questions from Reuters.

The PBOC has cut banks’ reserve requirement ratios (RRR) four times this year to lower funding costs an inject more liquidity, the last time in mid-October, while regulators have pressed banks to help keep cash-starved companies afloat.

But China’s stubbornly weak credit growth has spurred talk of its first cut in benchmark lending rates in three years.

ING said a note on Friday that it expected four more RRR cuts in 2019 plus two modest cuts in the PBOC’s 7-day policy rates and a gradual depreciation of the yuan currency if the trade war with the United States continues to escalate.

The PBOC skipped reverse repos operations for a 22nd trading day in a row on Monday. (Reporting by Winni Zhou and John Ruwitch; Editing by Kim Coghill)

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