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PBOC injection eases 'hot money' fears

By Wang Xiaotian (China Daily)

13:23, October 31, 2012

Worries about speculative capital inflows into China since the Federal Reserve's third round of quantitative easing, or QE3, have moderated, after China's central bank injected a single-day record amount of cash into the banking system on Tuesday.

The People's Bank of China, or PBOC, sank 395 billion yuan ($63 billion) into the market through seven- and 28-day reverse bond repurchase agreements.

The seven-day transaction of 290 billion yuan is at an interest rate of 3.35 percent, and the 28-day transaction of 105 billion yuan is at 3.6 percent, it said in an announcement posted on the central bank's official website.

"While the PBOC conducted a large amount of reverse repo operations last week, overall market liquidity appeared quite tight, as the amount of matured funds was much bigger," said the Australia and New Zealand Banking Group in a research note.

Liu Yuhui, director of the financial lab at the Chinese Academy of Social Sciences, said Tuesday's move dismissed market concerns of large amounts of capital flowing into China, which might have left the PBOC having to draw out liquidity, instead of injecting money.

"Instead of a capital inflow, the recent hike in the yuan against the dollar was mainly because the central bank didn't sell yuan and purchase foreign currency timely, when the demand for changing foreign currency into yuan by individuals and institutions had increased."

Liu added that although there was little evidence of "hot money" - the flow of funds or capital from one country to another, often to earn short-term profits on interest rate differences and changes - coming into the system, it was necessary for the PBOC to manage the market's expectations for the yuan, after its appreciation in recent days.

The central bank on Tuesday set the national currency's reference rate against the dollar at 0.06 percent lower at 6.3028 per dollar, weakening the mid-point for the first time in four days.

But the yuan still gained 0.05 percent to close at 6.2405 against the dollar.

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