The People's Bank of China's (PBOC) largest-ever weekly issue of central bank papers yesterday was not as much a sign of eagerness to absorb market liquidity as it appeared, but analysts say it certainly mirrored the pressure it faced to keep money supply growth stable.

The central bank's announcement on Monday of a 50 billion yuan (US$6 billion) issue of central bank papers had appeared to be signalling its stronger will to bridle rapid loan rises by soaking up cash excesses in the interbank market, as money supplies continued to soar in July. Partly as a result, all the 19 treasury bond issues trading in the Shanghai bourse closed down on Monday.

But analysts said they believed the issue was not as hefty an upshift in the central bank's contractive open market operations as it appeared, but rather a move to "keep the money market interest rates stable," as the PBOC claimed in a notice, when a huge amount of repurchase (repo) contracts and central bank papers are expiring.

The outstanding repo contracts on the central bank's books as well as central bank papers that expire within this week total some 36 billion yuan (US$4.3 billion), analysts say. That means the money the PBOC withdraws from circulation this week is only worth 14 billion yuan (US$1.7 billion).

The PBOC has been scaling up open market operations this year in an effort to curb the rapid increases in money supplies. M2, the broad measure of money supplies which covers cash in circulation and all deposits, soared by 20.7 per cent on a year-on-year basis to 20.62 trillion yuan (US$2.48 trillion) at the end of last month, a pace that was "on the fast side," it said on Monday.

The central bank's open market operations are heavily offset by its purchases of mounting US dollars in the market, a result of China's strong export rises, to enforce a trading band of the renminbi.

In a report in May, the PBOC hinted at the possibility of raising the mandatory reserve ratio, or the amount of deposits commercial banks are required to leave with the central bank. But at the time they did not mention the move, which many said was radical, in its ensuing monetary policy reports.

But it seems to be attaching more importance to central bank papers in its efforts to maintain an appropriate money supply growth, calling the tool the "practical option" and an "effective method" for money supply movement in its July monetary policy report, issued on Monday.

Analysts say the issuing of central bank papers may be stepped up even further, with 138 billion yuan (US$16.6 billion) worth of central bank papers and repo contracts on PBOC's books expiring in September, as compared with the 81 billion yuan (US$9.7 billion) that expire this month.

(China Daily August 13, 2003)