China: The reported PBoC repo operation does not mean a shift of monetary policy

Reuters reports that the People’s Bank of China (PBoC) has recently drained over RMB100bn liquidity from the interbank market via a repo operation at the market rate. According to the report, the repo operation was initiated by certain commercial banks which are said to have too much liquidity and cannot repay the funds received from the PBoC via the medium-term lending facility earlier than scheduled.

    This news has not been confirmed by the PBoC. But it has been widely cited by major domestic financial media with no denial from the central bank.

    We do not think this move means a shift of monetary policy from an easing to a tightening bias. If the Reuters report is true, the move could simply be action to offset extra liquidity in interbank market. The 7-day repo rate has fallen significantly since March and remains low at 2.1% today (Figure 1), suggesting no liquidity tightening in the interbank market. Capital outflows stabilised in April and may reverse to inflows in May as the domestic equity market rallied rapidly. FX purchases by financial institutions increase by RMB32.4bn in April from a decrease of RMB156.5bn in March, and CNY depreciation expectations subsided as well (Figure 2). Meanwhile, the significant drop in growth of fixed asset investment and loans in April suggests credit demand is also weak owing to softening aggregate demand.

    Overall, we think this move is more a technical operation than a shift of policy stance as inflation remains subdued and economic growth momentum remains weak, as reflected by April’s soft industrial production growth and May’s sub-50 HSBC flash PMI reading.

    We maintain our call of further monetary easing, with two more 50bp cuts to the banks’ reserve requirement ratio and two more 25bp policy interest rates cuts over the rest of this year. The most likely timing for the next easing is July, in our opinion, as it will take time for policymakers to assess the impact of policy easing taken so far (see China: IP improves, but weak demand still calls for further easing, 13 May 2015). We continue to expect real GDP growth to slow to 6.6% y-o-y in Q2 from 7.0% in Q1 before edging up to 6.8% in H2.