SHANGHAI, Oct 11: China’s key money rate held steady on Thursday, with traders saying interbank liquidity was now quite loose after a third consecutive week of fund injections by the central bank.
The central bank injected a net 164 billion yuan ($26.10 billion) this week, compared to the record 365 billion yuan in the last trading week before the week-long October holiday.
Uncertainty looms over the market, however, due to 704 billion yuan in reverse repos which will mature over the next two weeks, causing a drain in liquidity.
Absent further net fund injections, traders say conditions could tighten near the end of next week, as corporate tax payments based on third-quarter earnings come due on Oct. 15.
‘With the impact of tax payments, the next two weeks will be rather tight, so I think the central bank will have to keep injecting funds,’ said an analyst at a large state-owned bank in Shanghai.
While the central bank will likely to be forced to at least roll over the maturing reverse repos, it could reduce the volume of its net injections.
‘If things stay this loose, rates could fall further. But in that case I wouldn’t rule out the bank cutting back on reverse repos,’ said a trader at a major state-owned bank in Beijing.
After plunging 60 basis points on Wednesday, the benchmark weighted-average seven-day bond repurchase rate edged higher to 3.1846 percent around midday, up 2 bps from Wednesday’s close but still well below its close of 3.8262 percent on Monday.
The overnight repo rate extended its fall, dropping 19.84 basis points to 2.4481 around midday, its lowest level in a month.
Traders and analysts are divided about whether the increased used of reverse repos since June marks the start of a long-term shift away from reliance on quantitative tools such as the reserve requirement ratio (RRR) to manage liquidity.
An alternate view is that the reliance on open market operations is a stop-gap ahead of the Communist Party Congress that opens on Nov. 8. Traders say the PBOC wants to avoid taking dramatic policy steps in the run-up the Congress.
‘The political element is pretty important,’ said the analyst, referring to the central bank’s possible motivation for relying on reverse repos rather than an RRR cut.
‘Without the leadership change, the chances of such a big move in monetary policy change would be less. They’re waiting for new leadership to set the guiding policy principles before considering any large-scale adjustments to monetary policy.’
(AGENCIES)
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