China's central bank Tuesday suspended open market operations for the eighth trading day in a row, indicating the financial system was awash with liquidity and that there was no mid-year liquidity crunch this year.
Despite the continuous suspension of open market operations, market interest rates generally declined. The one-year Shanghai Interbank Offered Rate (Shibor), a key indicator of interbank borrowing costs, edged down to 2.6897 percent Tuesday from 2.7170 percent on Monday last week.
"While the market is facing more severe mid-year liquidity pressure than in previous years, the central bank's effective liquidity management and better communication skills help stabilize the market," said Zeng Gang with the Chinese Academy of Social Sciences (CASS).
Compared to previous years, the central bank sent clear signals and pumped sufficient money into the market earlier this year, easing the mid-year crunch significantly, according to Zeng.
Every June there are fears of the reoccurrence of a mid-year liquidity crunch, and this year was no exception. Such fears once crippled markets in the wake of a rising Shibor.
In response to these worries, the central bank made clear at the end of May that it was aware of market sentiment and planned to inject money into the financial system via the medium-term lending facility (MLF) and 28-day reverse repos in the first two weeks of June.
The central bank has fulfilled its promise, injecting 30 billion yuan (4.76 billion U.S. dollars) into the financial system through 28-day reverse repos on June 5 and pumping 498 billion yuan via the MLF the next day.
In addition, the central frequently conducted reverse repos, with a maximum daily volume of 290 billion yuan and specific explanations on every move, to maintain stable liquidity.
"The central bank has not only guided positive market expectations but also taken action ahead of market volatility, which helped keep stability," said Wen Bin from China Minsheng Bank.
Institutions' finances were not really tight on many occasions but they were worried about uncertainties in the future. As a result, good communication between the central bank and market players are very important, Zeng said.
On the other hand, financial institutions are actively adapting to the changing circumstances.
After the implementation of the central bank's macro prudential assessment of commercial banks, a formal evaluation covering loans and other assets, banks are adjusting their balance sheets and business models, said Li Qilin with Lianxun Securities.
Rising fiscal spending near the end of month offset maturing reverse repos, so there is a relatively high level of liquidity in the banking system, said the central bank in a statement explaining its suspension of open market operations.
As for the next phase of monetary policy, "it will depend on updates at home and abroad," Wen said, citing China's economic development in the second quarter, especially the growth rate and consumer prices as well as U.S. monetary policy in coming months.
China's GDP expanded 6.9 percent in the first quarter of the year. It targets an annual growth rate of around 6.5 percent for 2017.
CASS expect the economy to grow 6.7 percent, 6.6 percent and 6.5 percent in the second, third and fourth quarter, respectively.
The country has set the tone of its monetary policy in 2017 as prudent and neutral, keeping an appropriate liquidity level but avoiding excessive liquidity injections.
Zeng expected no change to the tone and warned against higher financing costs. "Monetary policy needs to be flexible and pay attention to multiple objectives," he said.
