China is injecting resources into its internal market, causing a rubber-band effect. Putting money in and then taking it back out, forcing the reverse repo, the buyback rate that measures the interest on interbank credit, into negative oscillations. When it releases liquidity, Beijing sees its interest rates go down; when it removes capital by repurchasing the previously emitted bonds, interest rates tend to go back up. The move, however short lived, has an expansive effect, so much so that it has become a recurring practice. Bonds that offer quick liquidity seem to have become the norm. Last September, to finance spending during the October 1st national holiday, the People’s Bank of China (PBOC), China’s central bank, injected a record $58 billion (365 billion RMB) using the typical reverse repurchase agreement. A similar operation, although of lesser size, was initiated a few days later. Another record was set at the end of October when the PBOC made available another $60.7 billion with another open market operation. Beijing is evidently concerned about the excessive slowdown of its economy. The World Bank’s most recent prediction put its growth for 2012 at 7.7%. A number enviable anywhere in the world, it is nevertheless China’s lowest result since the early 1990’s, following the events in Tiananmen Square. The financial operations have been foreseeable since last May, when the government approved a plan for the construction of infrastructure to support global demand. The plan integrates both traditional investments in the manufacturing sectors and consumption by families, with the former unable to sustain growth. A three-month period to begin fundraising was necessary after its approval, which have been aided by the current autumn. The danger posed by the operation is the resurgence of inflation, brought under control by previous restrictive action. The Governor of the PBOC, Zhou Xiao Chuan, has given reassurance concerning the propriety of the operation, on the stability of prices, and on a medium-term prospective, has guaranteed that the availability of money is not in excess, but necessary to guarantee an orderly development of the economy. His attention is in fact directed towards the needs of the financial and service sectors that, in his words, need to integrate with industrial production. The liquidity injected into the system does not impose permanent or stable measures like the lowering of interest rates, something that the balance of accounts at the moment may not be able to withstand. Similarly structural would be the reduction of bank required reserve ratios. In the absence of more sophisticated operations in the international market, which China is not accustomed to, the PBOC turns to small, short-term adjustments, while waiting for new and more decisive measures that can only come from the political field.
