Metalnewsnet 18 Mar:

China's central bank is set to mop up a massive 213 billion yuan ($31 billion) in its open market operations this week, suggesting less pressure for a near-term rise in banks' reserve requirements to drain funds.

The hefty net drain of cash from China's money markets, the largest in the central bank's regular weekly operations in two years, may continue and absorb enough surplus funds for now to let authorities keep money conditions under control without resorting to other steps, traders said.

Fears of further moves by Beijing to tighten credit, after two increases in reserve ratios so far this year and a clampdown on lending, have contributed to jitters in equity and commodity markets across the globe.

But money traders have been eyeing the amount of funds the People's Bank of China (PBOC) is able to drain through its bills and short-term bond repurchase agreements in recent weeks as a gauge of the likelihood of a near-term hike in banks' required reserve ratios. "The amount of money drains through bill sales is probably already sufficient for the central bank and looks sustainable," said Liu Junyu, analyst at China Merchants Bank. "So the bank may now want to monitor March lending data before deciding if it needs to raise reserve ratios."

Inflows of funds from overseas and a flood of PBOC bills due to mature this month had spurred worries that the central bank could take fresh steps, such as increasing banks' reserve ratios, as soon as this week to withdraw excess funds from the banking system. A total of 190 billion yuan in central bank bills and repos will mature this week.

RECORD VOLUME

But the week's net drain of 213 billion yuan is equivalent to about two-thirds of what a 0.5 percentage point bank reserve requirement hike would typically achieve, according to analysts.

The PBOC auctioned 130 billion yuan of three-month bills on Thursday, the largest sale of such bills on record, surpassing last week's previous record of 120 billion yuan. It is also draining 80 billion yuan via 91-day bond repurchase agreements on Thursday, traders said.

On Tuesday, it drained 130 billion yuan via a sale of one-year bills, the biggest such sale since September 2008, and mopped up a further 80 billion yuan through 28-day repos. The PBOC this week held the auction yield on its one-year bills at 1.9264 percent and on its three-month bills at 1.4088 percent for an eighth week in a row, suggesting it is having little trouble finding demand without guiding rates higher.

This success in part reflects a relatively sanguine outlook on medium-term inflation, despite an increase in annual consumer price inflation to a 16-month high of 2.7 percent in February, up from 1.5 percent in January.

Premier Wen Jiabao at last week's annual session of the National People's Congress said China would stick to an appropriately easy monetary stance, soothing worries about possible aggressive steps to tighten monetary policy.

An auction of nine-month finance ministry deposits to commercial banks on Thursday produced a surprisingly high rate of 3.4 percent, suggesting some banks may be facing tight liquidity conditions, which may also make the PBOC cautious in hiking reserve ratios.

The 3.4 percent rate for the deposits is nearly as high as Thursday's indicative bid yield of 3.4409 percent on 10-year government bonds in the secondary market , Reuters Reference Rates showed. ($1 = 6.82 yuan) (Source: Reuters)

Editor: KylinTse