China's money rates drop on liquidity support and mild yuan recovery

[SHANGHAI] China's primary money rates fell sharply for the week on liquidity support through a central bank-led medium term lending facility (MLF), and mild yuan strengthening against the dollar also eased demand for cash, traders said.

Money conditions showed few signs of pressure this week as the MLF loans offset a net cash drain by the People's Bank of China (PBOC), traders said.

And the fall in the rates also came the week after the usual peak in corporate tax payments, which typically takes cash out of the money market, driving rates higher.

The volume-weighted average rate of the benchmark seven-day repo traded in the interbank market, considered the best indicator of general liquidity in China, was 2.2952 per cent, 28.97 basis points lower than the previous week's closing average rate.

"Money supply and demand in the market is balanced with a loosening bias, and such a situation may remain in the near term, but the liquidity probably gets tight again from the middle of the month," said a trader at a Chinese bank in Shanghai.

China's central bank drained a net 104.1 billion yuan from the market through open market operations this week, compared with a net injection of 595 billion yuan a week earlier.

But the impact of net cash drain was outweighed by MLF operations. The PBOC injected 437 billion yuan (US$64.64 billion) to 21 financial institutions for six months and one year via its MLF on Thursday. However, the next batch of 115 billion yuan of such loans is maturing on Nov 16, according to Reuters calculations based on the data from the central bank.

The MLF is a supplementary policy tool that the central bank uses to manage conditions and medium-term interest rates in the banking system and money markets.

Traders said the market had expected the MLF operations on Thursday, but the fresh cash boosted market sentiment and some interpreted it as a sign the central bank would continue to keep liquidity at an appropriate level.

Still, in recent weeks the central bank has used a longer tenor in its loan operations, leading traders and analysts to deduce that it is trying to reduce dependence on cheap borrowing and curb leverage.

In addition, the trader argued that tight liquidity at the end of October may also have been due to yuan weakness, forcing some big state banks to hold cash without lending to others in the market.

"The yuan has recovered slightly this week, so the tightness also eased," she said.

China's yuan firmed slightly against the dollar on Friday, and is on course to post a weekly gain of 0.3 per cent, its biggest in more than three months, as growing uncertainty over the US presidential weighed on the greenback.

The Shanghai Interbank Offered Rate (SHIPBOARD) for seven-day tenor fell to 2.4050 per cent on Friday, one basis points lower than the previous week's close.

REUTERS