PBoC's recently increased its liquidity as it injected CNY600bn via medium-term lending facility (MLF) on Tuesday, followed by another CNY150bn liquidity injection via short-term liquidity operation (SLO) and CNY400bn via reverse repos this morning, recording the highest daily injection in open market operations (OMOs) in the previous three years. This illustrates that there is a tightening bias in onshore market liquidity conditions.

The central bank had to ease its liquidity as it witnessed capital outflow due to CNY's depreciation. However, as PBoC sells USD and buys CNY in FX market to stabilize the CNY exchange rate, CNY's liquidity should have been exhausted.

"But keep in mind that the bottom line is that China will have to maintain an accommodative monetary policy stance to counter the economic slowdown. That said, RRR cuts are still on the table and CNY will weaken eventually"- Commerzbank