SHANGHAI | Thursday January 6, 2011 11: 23 pm EST
SHANGHAI (Reuters) - changes in how China handles massive liquidity into the financial system and the faster influx of persistent capital chasing appreciation of the yuan may be sales auctions of short-term debt a key indicator of Beijing policy intentions.
Bank of China uses increases targeted in reserve requirement ratios of banks (RRR) Bay and bubbles in prices in recent months as one of its main tools to prevent inflation.
In arriving at this new clamping lever, the Central Bank was remote from the open market operations, mechanism relied for years, absorbing the excess of money.
Change announce a milestone in reform overdue in rigid rates of China's system.
Observers of the market that the Central Bank may be slowly changing to use bill auction yields to signal its intentions future interest rates, a step towards transparency in an otherwise cloudy and centralized financial system.
"Looking at what the PBOC was done since October, you get printing that RRRs are used as the key tool to adjust the liquidity of the market", said a dealer in a Chinese State Bank.
"Open market operations have become somehow a rate barometer".
Major central banks in market operations global use of index interest rate moves, but the PBOC was widely used to balance the money supply since the beginning of regular operations on the open market in the 2000s.
China's interest rate regime is still tightly controlled. Banks are allowed to define the deposit rates slightly lower than the rate of reference of the Government, while the rate of loan may be slightly higher.
The PBOC is not the last word in farming or cutting official rates. The Council of State, or the cabinet is the final arbiter on rate movements after consultation with the PBOC.
The market is often left in darkness before official rate changes, and the lack of transparency in the overall process has been a source of financial market volatility and one irritating to traders.
Beijing has promised to reform the rigid system, but these movements have been slow to materialize. The Government, to guard against social instability, feels obliged to protect the interests of depositors in a country with a very high savings rate.
PBOC TAKES THE INITIATIVE
The PBOC raised twice the interest rate and RRR for all banks three times since October, partly to Don a cap asset price at a time where announced U.S. a second quantitative easing series, growing nearly stream record money in China.
He has also twice used increases differentiated in RRR selected for some banks for three months without officially announcing it. Dealers see this opening the way for more repressive measures against the banks who have lent excessively.
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