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China's PBOC, trading platform signal floor for interbank rates, say sources

Shanghai

CHINA'S interbank trading platform has introduced trading alerts to prevent money market rates from falling below specific levels, three sources with direct knowledge said on Wednesday, following a recent plunge in some short-term rates.

The move came a day after the People's Bank of China (PBOC) said that lending and borrowing rates in short-term markets should not fall below the rate it offers on excess cash that banks park with the central bank "under normal circumstances".

That rate is currently 0.72 per cent.

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Despite its efforts to support the slowing economy by easing policy and injecting ample cash supplies into markets, the PBOC has been uneasy about the sharp drop in market yields.

Traders said the National Interbank Funding Center (NIFC), also known as the China Foreign Exchange Trade System, would alert traders if they put in bids or offers outside a daily trading band of 70 basis points around the weighted average repo rate. Further details of how the band would operate were not immediately available.

The overnight bond repurchase rate was substantially higher on Wednesday, trading at around 1.82 per cent by early afternoon.

This week, the PBOC suspended some traders at Ping An Bank and China Merchants Bank for a year for involvement in "abnormal" trades.

The two lenders were involved in overnight bond repo trades in the interbank market that put the price at 0.09 per cent on July 2.

In a series of posts on Tuesday evening on its official Weibo social media account, the PBOC attributed the extremely low price to "misoperation" by traders.

The overnight repo rate fell below one per cent between June 24 and July 5, the PBOC said on Weibo, hitting a low of 0.8431 per cent on July 4.

"It was a relatively low level, but remained higher than the interest rate on excess reserves of 0.72 per cent," the PBOC said, noting that it is one of its policy rates.

Short-term borrowing rates fell in late June after the central bank injected generous amounts of liquidity ahead of a seasonal surge in cash demand.

Typical jitters over liquidity at this time of year were heightened after regulators took over debt-laden Inner Mongolia-based Baoshang Bank in May. Some smaller banks and brokers struggled to get short-term funding and their financing costs spiked, though rates have largely moderated since.

With China's economy still cooling, policymakers are expected to roll out more growth boosting measures in coming months. REUTERS