By injecting the most cash in three years in open-market operations, China is using various tools to ensure ample liquidity without cutting banks' reserve requirement ratios (RRR), according to a UBS economist.
The People's Bank of China (PBOC), the country's central bank, plans to use a variety of facilities rather than RRR cuts to ensure liquidity and stable short-term rates in the near term, UBS economist Wang Tao said in a research note.
Liquidity conditions often tighten ahead of the week-long Chinese Lunar New Year holiday, which falls on Feb. 8, and the central bank usually injects large amounts of cash into the money market to keep interest rates steady.
"The central bank plans to fully cover any additional holiday cash demand during the Chinese New Year period," Wang said in the note.
RRR cuts are a relatively effective tool to replenish liquidity and are favored by commercial banks, but the central bank believes they could send too strong an easing policy signal, which may lead to lower short-term rates and put downward pressure on the Chinese currency, she said.
In open-market operations on Thursday, the PBOC conducted 110 billion yuan (16.8 billion U.S. dollars) of seven-day reverse-repurchase agreements and 290 billion yuan of 28-day contracts, it said in a statement on its website.
Earlier on Tuesday, the PBOC said it would inject at least 600 billion yuan to provide liquidity through tools such as standing lending facility (SLF), medium-term lending facility (MLF) and pledged supplementary lending (PSL).
The Chinese central bank released around 1.18 trillion yuan of liquidity into the money market in the past week, according to Wang Tao.
Although the central bank seems to be very clear in its policy intentions at the moment, Wang said she still expected the PBOC to conduct multiple RRR cuts in 2016. Last year, China made five cuts on the percentage of deposits that lenders are required to set aside.