Immediately after lowering the benchmark lending rate and reserve requirement ratio, People's Bank of China (PBOC), China's central bank, drained 185 billion yuan from the banking system via central bank papers and repurchase agreement transactions.

Among the 185 billion, 145 billion was drained through one-year central bank bonds. There are four types of central bank papers: 3-month, 6-month, 1-year and 3-year. The market capital will be retained for the bills' duration.

To lift inflationary pressure, the PBOC is adjusting capital available in the market every Tuesday and Thursday via open market operations, with the amount depending on liquidity of the banking system. More funds will be drained if the liquidity is ample, and vice versa.

The PBOC's move to drain such high liquidity is attracting attention from business circles. Some experts suggest that these measures indicate that monetary policy is unlikely to loosen up this year.

Guo Tianyong, dean of the China Banking Research Center of the Central University of Finance and Economics, said that the lowering of the reserve requirement ratio indicates liquidity in the banking system is imbalanced – ample and stable in big banks, limited and volatile in small and medium ones. The task of the central bank is therefore to achieve balanced liquidity in the banking system.

Statistics released by the central bank show that the balance of deposits at the end of August is 45 trillion yuan, up 19 percent year-on-year, supporting the liquidity of the banking system to a certain extent.

(China.org.cn by Fan Junmei September 17, 2008)