SHANGHAI, Feb 19: Liquidity conditions remained loose in China’s money markets on Tuesday, despite the central bank actively withdrawing funds in open market operations for the first time in more than seven months.
Cash that was withdrawn as customers made preparations for the Lunar New Year holiday spending is now flowing back into the banking system, boosting liquidity.
Traders say a large volume of foreign exchange purchases by the central bank in recent weeks is also contributing to loose funding conditions.
These factors have kept interbank lending rates low, despite the 860 billion yuan that will be withdrawn from the banking system this week due to maturing reverse bond repurchase agreements.
The benchmark weighted-average seven-day bond repurchase rate was at 2.94 percent near midday, marginally higher than its 2.91 percent level at Monday’s close. Anything below three percent generally indicates loose conditions.
The overnight repo rate remained depressed at 1.88 percent, up from 1.85 percent on Monday. Volumes have been low, as ample liquidity from returning customer deposits and FX purchases have reduced demand for interbank loans.
The People’s Bank of China (PBOC) on Monday signaled its intention to mop up additional liquidity by auctioning forward bond repurchase agreements. The PBOC hadn’t used forward repos since June last year, as it focused on boosting liquidity through reverse repos.
But on Tuesday the central bank auctioned only 30 billion yuan in 28-day repos, easing concerns of a more abrupt tightening. The PBOC chose not to sell any 91-day repos, whose longer tenor would have caused a more lasting impact.
The interest rate on the PBOC’s 28-day instruments , at 2.75 percent, was also lower than the current interbank rate, indicating that the central bank is not eager to steer rates higher.
A strong trade surplus in January, as well as efforts by the central bank to restrain appreciation in the yuan, is responsible for the apparent surge in FX purchases, though the market is still waiting for official data on FX purchases in January.
(AGENCIES)
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