Market liquidity supply sees big change

"It's still hard to say whether the capital outflows will continue in the next few months. But certainly the increase in yuan holdings for purchasing foreign exchange would fall compared with past years, mainly due to drops in the trade surplus," Zhao said.

"Generally speaking, liquidity supply has already changed, although it wouldn't put too much pressure on the central bank right now."

Buying treasury bonds in the secondary market would become a major channel for the central bank to create money in the future, China Business News reported, citing an anonymous analyst close to central bank decision-makers.

But controlling liquidity through purchases and sales of treasury bonds requires a bigger and more mature secondary market. Otherwise, large-scale purchases made by the central bank would raise interest rates and spur the issuance cost of such bonds, said the analyst.

"Currently, central bank bills and treasury bonds are in separate markets. Only if China completely frees interest rates could the two markets be linked and the central bank could operate like the US Federal Reserve," Zhao said.

Before the sterilization of foreign exchange fluctuations became a mainstream channel to issue currency, re-lending to commercial lenders was the main tool of China's central bank to create money, accounting for 80 percent of newly injected money in the 1990s.

It's unlikely that China will return to relying on re-lending, which lacks a direct connection with the real economy, said analysts.

Some said it was too early to say that the liquidity supply system will turn from a "passive" to "proactive" pattern as the yuan would probably go up and attract capital inflows due to policy loosening in major economies, such as the Fed's third round of quantitative easing, the European Central Bank's bond-buying plan, and the formal launch of the 500 billion-euro European Stability Mechanism on Monday.

The yuan climbed on Sept 28 to its highest level against the US dollar since it was unpegged from the greenback in July 2005.

Yu Yongding, a former adviser to the central bank, said in September that it's time for the central bank to reduce intervention in currency markets and let the yuan float freely, as economic growth will remain at a lower level compared with recent years and capital flows become two-way.

China should take advantage of the opportunity that market sentiment might drive down the dollar to broaden the range of the yuan's exchange rate, said Liu Yuhui from the academy.

wangxiaotian@chinadaily.com.cn