(Yicai) Aug. 8 -- Although China’s central bank has siphoned a net CNY200 billion (USD27.8 billion) from the banking system so far this month through outright reverse repurchase operations, analysts expect it to keep adding liquidity in August to prevent medium-term tightening.

With liquidity squeezed this month by increasing long-term debt issuance and certificates of deposit maturities, the People’s Bank of China is likely to continue the net injections through outright reverse repos that it started in June, said Ming Ming, chief economist at Citic Securities.

The Politburo’s July 30 meeting stipulated faster government bond issuance and usage, so such sales will remain strong in August. In addition, a large volume of CDs will fall due, and regulators have repeatedly stressed “guiding financial institutions to increase lending and credit supply.”

To maintain ample liquidity in the banking system, the PBOC said yesterday that it would add CNY700 billion via three-month outright reverse repos today using a fixed-quantity, interest rate-bidding, and multiple price-bidding method. With CNY400 billion of three-month repos and CNY500 billion of six-month repos maturing, it has drained a net CNY200 billion so far this month.

The bank will likely conduct at least one six-month outright reverse repo operation this month, with the total added exceeding CNY900 billion, said Wang Qing, chief macroeconomic analyst at Golden Credit Rating International. And with CNY30 billion of medium-term lending facility loans maturing, it is expected to roll over a larger amount to ensure a net injection, Wang said.

The PBOC introduced outright reverse repos last October to help keep financial system liquidity at reasonable levels. The tool auctions a fixed quantity through interest-rate bidding with multiple winning prices, is open only to primary dealers, is typically held monthly, and can have maturities up to one year.

While short-term liquidity will remain relatively stable and ample in August, there will be some tightening pressure on medium-term liquidity, so the PBOC is expected to continue to inject mid-term funds through the MLF and outright reverse repos, Wang pointed out. 

The probability of a cut in the reserve requirement ratio -- the percentage of funds banks must hold in reserve -- is low in the short term, according to Wang. The PBOC is more likely to maintain ample liquidity through policy tools such as the MLF and outright reverse repos, he added.

However, the official manufacturing purchasing managers index remained in contraction territory last month, indicating that pressure on the economy has increased, Wang said, adding that the PBOC may consider lowering the RRR and interest rates next quarter.

Editor: Martin Kadiev