From Nomura:
Following easier liquidity conditions since the lunar new year holidays, with the 7-day repo rate dropping from 5.41% to 3.86% yesterday, the People’s Bank of China (PBoC) has conducted its first open market operation (OMO) in the repo market since June 2013.
A total of RMB108bn has been drained from the system so far this week through repos (RMB48bn on Tuesday and RMB60bn today on the 14-dat repo at 3.8%). This is a signal that the PBoC, in our view, is reiterating its still prudent/sound monetary stance, essentially quenching any loosening talk (if any) in the market following record credit creation in January. This may also be an early indicator of renewed foreign inflows, which have continued to accelerate in trend. December FX reserves stood at USD3.821trn, up 15% y-o-y from 4.8% in January 2013.
A quick comparison of spreads between levels at which the repo OMOs were conducted and benchmark rates (3m deposit rate as proxy, 2.60%) suggests tightening is still the policy bias. Prior to this week’s operation, the last repo OMO was on the 28-day repo in June 2013 at 2.75%, 15bp over the 3m deposit rate. The shorter tenor 14-day repo now is conducted at 120bp over the 3m deposit rate.
