(Yicai) March 6 -- China’s central bank drained a net CNY200 billion (USD29 billion) from the market  through three-month outright reverse repurchase operations. But this does not mean liquidity is tightening nor that a cut in the reserve requirement ratio is imminent, according to banking industry insiders.

The People’s Bank of China conducted an CNY800 billion outright reverse repo operation today by means of a fixed quantity and interest-rate bidding, with a term of three months, according to a notice it issued yesterday. CNY1 trillion (USD145 billion) of three-month outright reverse repo securities will mature this month, resulting in a net withdrawal of CNY200 billion, the first reduction since last June.

The move does not mean China is tightening liquidity, Dong Ximiao, chief researcher at Merchants Union Consumer Finance and deputy director of the Shanghai Institution for Finance and Development, told Yicai. The central bank acted after making a full assessment of the total amount of funds maturing today, prevailing market liquidity levels, and expected future trends in the funding environment, he added.

The smaller scale of the three-month rollover likely reflects the funding needs of banks and other financial institutions, and should not be interpreted as the PBOC tightening medium-term liquidity, said Wang Qing, chief macro analyst at Golden Credit Rating International.

Neither does it signal an impending cut in the RRR -- or the amount of cash commercial banks must hold in reserve -- Dong noted, adding that the move was just the PBOC flexibly using various tools for precise adjustment based on prevailing market liquidity conditions under its moderately loose monetary policy.

As government bond supply pressures have eased since the Chinese New Year holiday, overall liquidity has remained stable, with overnight and seven-day interest rates falling, and rates  on interbank certificate of deposits nearing their lowest levels in a year, said Ming Ming, chief economist at Citic Securities. Consequently, there is no urgency for the PBOC to significantly expand liquidity, he said.

Considerable room for and the likelihood of an RRR cut this year remains, Dong noted. The timing will depend on several factors, including the pace of government bond issuance, the trajectory of credit supply, and overall demand in the broader economy, he added.

Looking ahead, the central bank is likely to conduct six-month outright reverse repo operations that will result in a net liquidity injection, Wang said. He also sees a high probability of the PBOC carrying out its three-month medium-term lending facility operation this month, likely rolled over at the same size or larger.

March is the last month of this quarter, and liquidity conditions may tighten at the end due to factors such as bank performance assessments, Dong said, predicting that the PBOC will inject liquidity into the market through six-month outright reverse repos, MLFs, and reverse repos to maintain ample market liquidity and ensure the stable operation of the financial market.

The rise in bill interest rates at the end of last month may hint at a recovery in credit demand, according to Ming. With expectations for solid credit growth in the first quarter, he noted that a marginal tightening in liquidity conditions cannot be ruled out.

Six-month outright reverse repos, MLF operations, and treasury bond trading by the PBOC will continue providing relatively ample liquidity to the market, Ming forecast.

Editor: Futura Costaglione