Published on : Aug 20, 2015
The central bank of China has been injecting funds in the open market operations of the country since February. This intervention is intended to improve the yuan strained supply of cash and push the primary money market rate to a four-month high.
The People’ Bank of China (PBOC) has pumped nearly US$32 billion into the financial system of China this week, according to the latest data compiled by Bloomberg show. The is the highest amount to be pumped in China’s financial sector before the Chinese New Year holiday, which the time for seasonal demands to spike in the country. The authorities are also planning to inject another 170 billion yuan in the market through auctions of deposits or loans.
The injection of funds by the Central Bank of China comes after the country took investor by surprise by devaluing the yuan last week, and shifting focus to a more market-oriented exchange rate. PBOC intervention, under the new system, has partially replaced the role played by the daily reference rates in guiding the currency moves. Yuan purchases faces the risk of fuelling the borrowing costs higher during the period of slow economic growth rate, unless the monetary authority in the country releases more cash.
Driven by the stringent regulatory conditions, the front-end rates are edging up amid internvention by the Chinese Central Bank, said the head of Asia ex-Japan rates strategy at Hong Kong’s Societe Generale SA, Frances Cheung. He also said that the situation requires PBOC to step up in open market operations to counterbalance liquidity withdrawal especially on the sector of foreign exchange.
In order to take care of the situation, the authorities need to walk on the thin line between strategies to boost exports and satisfy the requirements laid down by the International Monetary Funds, to obtain reserve status for yuan alongside ensuring financial stability of the country.