Central bank injects more funds

The central bank injected more funds through open market operations on Thursday, to ensure commercial banks have adequate resources to lend to the real economy.

The People's Bank of China restarted reverse repo operations after a suspension of 19 consecutive trading days, through which 40 billion yuan (5.8 billion) was injected into the banking system, according to a statement on its website on Thursday.

Meanwhile, it also deposited 120 billion yuan in cash from the national treasury into commercial banks for three months at an interest rate of 3.7 percent.

But analysts have expressed their concern that the recent open market operation, a more frequently-used measure to meet the central bank's policy goals instead of changing the benchmark deposit and lending interest rates, may have resulted in too much easing of liquidity.

Thursday's moves followed an injection of 383 billion yuan into the market via the medium-term lending facility one day earlier.

Under the regime, commercial banks could borrow money from the PBOC at a cost of 3.3 percent within a year, unchanged from previous operations.

The MLF tool was introduced in 2014 to help commercial and policy banks maintain liquidity by allowing them to borrow from the central bank using securities as collateral.

Besides, the PBOC has cut reserve ratios for banks three times this year in an effort to inject liquidity into targeted sectors, and economists expect it to do so once or twice more later this year.

As the current liquidity has been largely eased recently, the interbank market's interest rate has seen obvious slips to a near two-year low.

That was mainly because "funds are sloshing around the financial system rather than being put to productive work in what the government calls the real economy", said He Wei, a financial researcher at FT Confidential Research, an independent research service from the Financial Times.

"Falling Chinese rates could make holding dollar assets relatively more attractive than holding renminbi assets, resulting in a drain of funding from the system as money leaves the country," said He.

"The problem now is how to channel the funds effectively into the real economy, instead of stocking in the banking system, and encourage banks to lend it out to companies that really need the funds," said Ming Ming, an analyst with CITIC Securities.

On Thursday, the PBOC Shanghai branch confirmed market rumors that it had banned commercial banks from using interbank accounts to deposit or lend yuan offshore through the Shanghai free-trade zone scheme, a measure to curb short-selling of renminbi in the offshore market.

The onshore yuan spot trading rate strengthened to 6.8960 per dollar on Thursday, up by 89 points from the last trading day's close.

Global markets throughout this week remains dictated by external pressures, with this most likely being encouraged by the intense risks around the Turkish lira crisis.

Jameel Ahmad, global head of Currency Strategy and Market Research at FXTM, said the threat to the Chinese currency would be that investors continue to remain "risk off" during this period, with a strict reduction in trading appetite towards emerging market assets.