SHANGHAI, Nov 14: China’s money rates were mixed on Wednesday, with the benchmark seven-day repo rate rising 18.71 basis points, a day before the central bank’s open market operations in which it is expected to inject more money, while allowing a net drain for the week.
The People’s Bank of China (PBOC) has adopted a strategy to use short-term reverse repos to help manage market liquidity since May. The short tenor of such instruments – between seven and 28 days – means that large injections of cash quickly turn into commensurately high drains.
While this allows the bank greater flexibility in maintaining near-term liquidity without having to resort to injections of long-term base money supply through reserve requirement changes, it has made both day-to-day operations and long-term strategising more complex for market participants.
The benchmark weighted-average seven-day bond repurchase rate rose to 3.3498 percent by midday from Tuesday’s close of 3.1627 percent.
The 14-day repo rate rose to 3.3923 percent from 3.3471 percent, but the one-day repo rate dropped to 2.3066 percent from 2.3252 percent.
‘Some banks have become more cautious about lending, while non-financial firms increased borrowing moderately, offsetting good liquidity conditions and keeping money market rates largely stable,’ said a trader at a Chinese state-run bank in Beijing.
‘This caution is partly driven by the belief that money markets have become over-reliant on central bank’s cash injections for liquidity,’ he said.
There is still an abundance of liquidity in the market for now, but banks and companies have already started considering their positions in light of seasonal surge of demand for cash in the final few weeks of the year, traders said.
For this week, 404 billion yuan ($65 billion yuan) in maturing reverse repos will mature and drain cash. The PBOC injected 186 billion yuan into the money markets in its open market operations on Tuesday, but 78 billion of that was created by seven-day reverse repos which will mature next week, draining cash again.
China’s main interest rate swaps (IRS) remained almost unchanged by midday, with the benchmark five-year IRS flat at 3.36 percent.
(agencies)
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