SHANGHAI, July 17: China’s money rates declined for a fourth consecutive trading session on Wednesday morning as liquidity flowed into the market from maturing instruments, while the central bank refrained open market operations.
After allowing an alarming liquidity crunch last month, the People’s Bank of China (PBOC) has abstained from open market operations since late June, in order to let maturing bond repurchase agreements and bills to resupply market liquidity.
Traders had seen the crunch as a signal from the PBOC to the banking system to start reining in riskier forms of credit growth, but Beijing does not want to subject the Chinese economy to too much stress.
As a result, short-term rates have returned to accomodative territory around 3 percent, and traders expect them to stay there for the near future.
The volume-weighted average for the benchmark seven-day repo contract was 3.6070 percent at midday, down over 10 basis points from Tuesday’s close.
The overnight repo also declined slightly to 2.9657 from 3.0113 percent, while the 14-day tenor lost 2 bps to 3.9791 percent.
The curve for interest rate swaps (IRS) based on the seven-day repo has been flattening out and rising steadily across the board, indicating general market expectations for tightening liquidity and generally higher borrowing costs going forward.
Markets do not yet appear to be pricing in an adjustment to official policy rates in either direction. Two-year IRS based on the one year yuan deposit rate are trading around 2.9 percent. Since deposit rates are usually adjusted in increments of 25 bps, this implies markets are not expecting susbtantial tightening or loosening via interest rates for the time being.
However, some economists, looking at disappointing export figures from June and the apparent weakness of the wider financial system, are now predicting the PBOC will move to cut reserve requirement ratios in the fourth quarter, injecting long-term base money supply. Many economists expect China’s economic growth rate to continue to slow in 2014, with some forecasting growth as slow as 6.9 percent.
(AGENCIES)
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