China's Central Bank to Strengthen Fluidity Control in 2007

As China's central bank seeks to temper excessive liquidity, analysts predict that the People's Bank of China will continue to employ monetary tools such as central bank bills and the required reserve rate to maintain fluidity control in 2007. In 2006, the central bank withdrew a record 1.2 trillion yuan ($US153.6 billion) through open market operations and upward adjustments of the required reserve ratio to reduce excessive liquidity. The open market operations involved regular weekly auctions and directional placements of central bank bills on four occasions, with the frequency of retrenching monetary policies reaching a record high.

Key Takeaways:

• The People's Bank of China withdrew 1.2 trillion yuan ($US153.6 billion) in 2006 through open market operations and upward adjustments of the required reserve ratio.
• The open market operations involved regular weekly auctions and directional placements of central bank bills on four occasions.
• The central bank raised the required reserve rate by a total of 1.5 percentage points, freezing 460 billion yuan in deposits.
• The trade surplus exceeded 150 billion US dollars and the state foreign exchange reserve topped one trillion US dollars by November 2006.
• The central bank issued a record 3,652.27 billion yuan bills in 2006, an increase of 30% over 2005.
• The repurchases hit a record high of 1,990 trillion yuan in 2006.
• The net money withdrawal in 2006 was smaller than the newly added positions for foreign exchange purchases in the corresponding period.

Statistics:

• 1.2 trillion yuan ($US153.6 billion) withdrawn in 2006 through open market operations and upward adjustments of the required reserve ratio.
• 771 billion yuan withdrawn through open market operations in 2006.
• 460 billion yuan frozen from upwards adjustments of the required reserve rate.
• 1.5 percentage points increase in the required reserve rate.
• 11 trillion yuan gap between bank deposits and loans by November 2006.
• 150 billion US dollars trade surplus exceeded in 2006.
• 1 trillion US dollars state foreign exchange reserve by November 2006.
• 3,652.27 billion yuan central bank bills issued in 2006.
• 30% increase in central bank bills issued in 2006 compared to 2005.
• 1,990 trillion yuan repurchases in 2006.
• 11 trillion yuan gap between bank deposits and loans by November 2006.

Sources:

• XIC, (date) no date provided. "China's Central Bank to Strengthen Fluidity Control in 2007".