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Central bank reverses trend of net injections as liquidity pressures ease

  • Published 23 Jul 2010

The People's Bank of China, the central bank, withdrew Rmb 81bn through open market operations this week, reversing the trend of net liquidity injections that has persisted for eight consecutive weeks. The move confirms our prediction (CC July 9 Update Alert) that the sharp liquidity shortage in the financial system would ease following the Agricultural Bank of China's IPO and the conclusion of the first half reporting period.

We tend to think the reversal of net injections is the central bank's reaction towards easing liquidity pressures, rather than a sign of inflationary concerns. We reaffirm that inflation remains under control and the pressure on the PBoC to raise lending rates is neutral or abating (CC May 11 Update Alert). We note also that the issuance interest rates on central bank bills remained unchanged this week. Rates on one-year central bank bills have been at 2.0929% for six consecutive weeks, while rates on 3-month central bank bills have been at 1.5704% for four consecutive weeks.

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