SHANGHAI, May 18: China’s money rates were mostly flat, with Friday’s implementaion of a cut in banks’ required reserve ratios (RRR) largely priced into the market earlier this week.
The benchmark weighted-average seven-day bond repurchase rate had inched up 1.07 basis points to 2.6958 percent by midday, snapping 10-straight days of decline.
‘The expectation was already there,’ said a trader at a large state-owned bank in Shanghai, when asked why the benchmark rate rose slightly on the day the RRR cut took effect.
The seven-day rate is still near a 13-month low and 49.44 bps below its close last Friday. Traders say conditions are likely to remain loose, though month-end factors could push up rates slightly next week.
China announced a 50 bps RRR cut on Saturday after economic data the day before showed slowing output, investment, retail sales and bank lending.
In the bond market, rates edged up after dropping precipitously this week. Benchmark one-year Chinese government bonds rose 15 basis points to 2.45 percent from 2.30 percent at Thursday’s close.
Traders see bond yields stabilizing over the next few weeks as long as there is no additional easing from the central bank.
‘The front-end should get support after dropping so much. There is a chance it could decline a bit further, but we don’t see much downside room,’ said a bond trader at a European bank in Shanghai.
But traders said they were doubtful the RRR cut would spur economic activity.
For most of the last decade, rapid growth and rates of investment returns far above the benchmark lending rate meant that loan demand almost always exceeded supply. As a result, liquidity – along with quantitative targets from the central bank – was the main constraint on banks’ ability to lend.
Now, however, analysts and traders say the lack of corporate demand for credit due to firms’ uncertainty about demand in the real economy is the main reason for weak loan growth in April.
News of Greece’s possible exit from the euro and sluggish domestic investment and consumer spending have further dented potential borrowers’ appetite for new loans.
Under such conditions, increasing bank liquidity may do little to spur additional lending, analysts said.
(agencies)
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