China's central bank injected a whopping 450 billion yuan ($72.20 billion) into the money markets on Tuesday, the largest single-day injection on record, showing Beijing's increased confidence in its ability to use short-term precision tools to manage the money supply.
Traders said the infusion of cash was made during ordinary open market operations, using 14-day reverse bond repurchase agreements, which will drain money back out of the system in two weeks.
The People's Bank of China (PBOC) has increasingly relied on such tools to maintain short-term liquidity and hold down interest rates, instead of making longer term adjustments such as cuts to bank reserve requirement ratios (RRR) that regulators fear could provoke inflation.
Liquidity typically tightens with the approach of the Chinese Spring Festival holiday, as individuals withdraw cash to spend on gifts, food and travel.
Some analysts had speculated that the central bank might be forced to cut the RRR before the holiday to prevent a squeeze, but instead authorities leaned more heavily than ever on short-term open market operations.
"With the Spring Festival drawing near, short-term liquidity in the money market is relatively tight," said a senior trader at a Chinese state-owned bank in Beijing.
The central bank has steadily been injecting cash since last week to stabilise short-term rates, he said, which often spike in the runup to traditional festivals.
Markets will be closed for a week starting on Feb. 9 for the Chinese Spring Festival holiday.
This time around it appears the PBOC has found the right formula to keep rates relatively stable, said Frances Cheung, strategist at Credit Agricole CIB.
"We have not seen the spikes in repo rates that we usually did see ahead of the Chinese New Year, likely upon willingness from the PBOC to provide liquidity," she wrote in a research note distributed on Tuesday morning.
The benchmark 7-day repo rate began moving upward as the Spring Festival approached, but Tuesday's massive injection has signalled to the market the bank's determination to keep rates in check by lowering the price of money.
A total of 198 billion yuan in maturing instruments are set to drain cash from the markets this week, which