SHANGHAI, Aug 24: Short-term funding rates tumbled in China’s money market on Friday, a delayed reaction to the central bank’s huge cash injection, with traders saying rates could fall further next week.
China’s central bank injected a net 278 billion yuan ($43.76 billion) into the banking system via an auction of reverse bond repurchase agreements this week, its largest net injection since early January. Traders and analysts widely interpreted the move as a substitute for a cut in banks’ required reserve ratio (RRR).
The fall accelerated on Friday, with the weighted-average 14-day bond repurchase agreement diving 52.49 basis points to 3.5020 percent in late morning, its lowest level since Aug. 14.
The overnight rate also dropped heavily, dropping 35.89 bps to 2.7016 percent, also the lowest since Aug 14.
The benchmark seven-day rate also fell, but less strongly, declining 19.42 bps to 3.6105 percent. That created the rare situation of the 14-day rate being lower than the seven-day rate.
Traders cited the 150 billion yuan in seven-day reverse repos issued on Tuesday, which will mature next Tuesday, as a reason for banks being more cautious on seven-day lending.
‘We have to be cautious and keep an eye out for what the central bank does next week,’ said a trader at a major state-owned bank in Shanghai.
Traders say the central bank’s decision to rely on open market operations, rather than RRR cuts, to maintain liquidity adds uncertainty because the instruments are short term – seven or 14 days – and so must be constantly rolled over.
Still, traders say the seven-day rate may bottom out at 3.50 percent next week.
‘There’s still a bit of room to fall, but not by a lot,’ said a trader at a city commercial bank in east China.
The central bank’s rate of 3.40 percent for its seven-day reverse repos and 3.60 percent for 14-day rate instruments are effectively a floor for the rate that commercial banks offer each other.
Indeed, in addition to the greater flexibility that reliance on open market operations gives the central bank compared to an RRR cut, reverse repos also allow the central bank to provide explicit guidance on interest rates via its auction rate, traders said.
Current Prev close Change (pct) (bps) 7-day repo 3.6105 3.8047 -19.42 7-day SHIBOR 3.6200 3.8000 -16.00 Note: Repo rate is weighted average.
Note: Repo rate is weighted average.
($1 = 6.3535 Chinese yuan)
(agencies)
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