SHANGHAI, Feb 6: China’s money rates were mixed this week as seasonal demand, including calls ahead of a long holiday period, was largely offset after the central bank made a system-wide cut to banks’ reserve requirement ratios (RRR) and conducted other cash injections.
A fall in benchmark Chinese interest rate swaps (IRS) after the RRR cut suggests markets are betting that the central bank will cut the official deposit rate again to support economic growth, traders said.
‘While the RRR cut had largely been priced in to money rates, it has nevertheless sparked fresh market bets that the central bank will cut official interest rates again,’ said a trader at a Chinese commercial bank in Shanghai. The weighted average of the benchmark seven-day repo rate , the barometer of China’s short-term liquidity supply, climbed 17 basis points from last Friday’s close to 4.34 percent by midday. But the 14-day rate, another active contract, fell 16 basis points from its Jan. 30 close to 4.78 percent, while the one-day rate dropped 4 basis points to 2.79 percent. The People’s Bank of China (PBOC) said late on Wednesday it was cutting reserve requirements, the amount of cash banks must hold back from lending, to 19.5 percent for big banks effective Feb. 5, a reduction of 50 basis points. That would free up 600 billion yuan ($96 billion) or more held in reserve at Chinese banks – which could then inject 2-3 trillion yuan into the economy after accounting for the multiplying effect of loans.
The PBOC also injected a net 90 billion yuan via open market operations this week, as part of its efforts to meet seasonal cash demand heading into the long Lunar New Year holidays around mid-February.
EASING OR NOT?
After the RRR cut, the benchmark two-year IRS dropped to 2.495 percent on Thursday from Wednesday’s 2.5033 percent, its lowest since late December.
The contract, based on the benchmark one-year deposit rate, now at 2.75 percent after the PBOC’s first rate cut in over two years in November, thus priced another 25-basis-point cut to the deposit rate by the central bank.
Beijing is desperate to stimulate a slowing economy, but flagging enthusiasm for Chinese assets makes it try repeatedly to pour cold water on market expectations of monetary easing. A senior PBOC official was quoted as saying that the RRR cut was not the start of a strong stimulus for the economy and did not represent a policy shift.
Lu Lei, head of the PBOC’s research department, told the state-owned Xinhua news agency that the cut was an ordinary policy operation, partly to fill the recent holes in China’s base money left by less central bank foreign exchange buying. The PBOC’s foreign exchange assets, a barometer of currency inflows bought up by the central bank and consequent base money injections, rose 641.1 billion yuan last year, less than a quarter of the 2.76 trillion yuan posted in 2013, according to Reuters calculations.
‘But the RRR cut on top of November’s rate cut, plus other channels of injections, has made the market believe that the monetary policy is anyway not as tight as before,’ said a dealer at a Chinese state-owned bank in Shanghai. (AGENCIES)
Follow our WhatsApp channel