SHANGHAI, May 2: China’s money rates eased on Thursday after a three-day holiday as cash flowed back into the market after banks and their corporate clients wound down a scramble to make tax and reserve escrow payments, traders said.
The volume-weighted average for the unofficial benchmark seven-day repo rate was at 2.9421 at Thursday midday, down from 2.9850 at last close. The overnight rate and the 14-day rate posted similar mild declines.
Rates had already begun to relax on Friday after the central bank allowed 124 billion yuan to flow back into the money market through open market operations, the first time it has injected funds on a net basis since mid-February when markets reopened after the lunar new year holiday.
Prior to that day, rates for the most commonly traded bond repurchase contracts had been steadily rising, with the volume-weighted average rate for the seven-day repo closing at almost 5 percent on April 25, its highest since Feb. 2012.
The end of the month usually sees rates come under upward pressure as banks adjust their accounts to meet regulatory ratio requirements. The end of April was aggravated by corporates stocking up on cash to make tax payments and by a holiday that saw markets close for the first three days of the week, denying banks access to fresh funds from the interbank market.
The People’s Bank of China adopted a neutral stance during Thursday’s open market operations, draining 30 billion yuan through of forward repos which exactly offset the 30 billion yuan injected by maturing instruments this week.
Interest rate swaps (IRS) remained stable, and markets appear to expect monetary policy to remain neutral, with two-year IRS based on the benchmark one-year deposit rate pricing at 2.9460. Since the official one-year deposit rate remains at 3 percent, this indicates the market is not currently betting on loosening or tightening since changes to the rate are usually made in minimal increments of 0.25 percent.
Some traders had previously expressed concern that an ongoing investigation into the practice of ‘substitute holding’ of bonds by third parties for the purpose of evading regulatory restrictions might have knock-on impact on liquidity, but there has been little sign of trickle down.
A trader at a joint-stock bank in Shanghai said there was no reason to worry that the investigation would result in dealers holding back from trade.
‘In terms of base money, dealers aren’t that worried,’ he said. The practice impacts how assets are traded back and forth, he said, but has no impact on the net supply of money in the system.
In addition to investigating the prevalence of substitute bond holding, in which fund managers temporarily sell a portion of their portfolio to a third party, regulators have also suspended new account openings by non-financial institutions.
(AGENCIES)
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