PBOC’s Zhou Says Holiday Cash Removed, Securities Times Reports

People’s Bank of China Governor Zhou Xiaochuan said the central bank drained cash from the financial system after last month’s Lunar New Year holiday to remove funds injected before the festival, the Securities Times reported.

The recent open-market operations “were needed after Spring Festival to remove some of the liquidity injected before Spring Festival,” Zhou was quoted as saying at the Friendship Hotel in Beijing today, according to the newspaper’s website. The one-paragraph report didn’t give further details.

The monetary authority drained a net 5 billion yuan ($803 million) of capital this week after withdrawing 910 billion yuan last week, the most since Bloomberg started compiling the data in 2008. The PBOC sold repurchase contracts for the first time since June on Feb. 19, taking out funds from banks after they lent the most money in two years in January.

The actions boosted speculation that the central bank was tightening monetary policy amid concerns that inflation is accelerating and real-estate price gains are excessive.

The overnight money-market rate rose 5 basis points today, increasing for a ninth straight day. The rate completed its biggest weekly jump in a year, climbing 190 basis points to 4.10 percent in Shanghai, according to a weighted average rate compiled by the National Interbank Funding Center.

Dariusz Kowalczyk, a Hong Kong-based senior strategist with Credit Agricole CIB, said in a Feb. 21 note that about a quarter of the 910 billion yuan drained last week was “aimed at liquidity tightening” and the reintroduction of repurchase contracts were a “tightening signal.”

Smooth Liquidity

In contrast, Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong, said in a Feb. 22 note that the central bank’s actions were designed to smooth liquidity after the festival from Feb. 9-15 and to counter reviving capital inflows, rather than tighten policy.

“Inflation pressures are still manageable, something that we expect to continue given China’s modest growth recovery in the coming quarters,” he wrote.

Two manufacturing purchasing managers’ indexes for February released today declined, a sign the country’s economic recovery that began in the fourth quarter may be losing steam.

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