SHANGHAI (Reuters) – China’s key money market rate hit a one-and-a-half-year low on Tuesday, showing few signs of stress from ample liquidity ahead of the peak in demand for cash at the end of the month.
High levels of liquidity also prompted some market participants to wonder if the easy cash conditions would be sustainable, as they turned their attention to this week’s policy meeting for more guidance.
The volume-weighted average of overnight repurchase agreements, or repos, traded in the interbank market fell to 1.0183% around noon Tuesday, the lowest since Jan. 8, 2021.
Banks and corporations generally have a higher demand for cash towards the end of the month to meet various administrative requirements and payment needs, which pulls cash out of the banking system to push up money market rates.
The seven-day repo, which could help financial institutions through the peak period for funds, rose only slightly by 7 basis points on Tuesday to 1.5870%.
It was well below the People’s Bank of China (PBOC) reverse repo rate for the same term of 2.1%.
“Market liquidity seems adequate right now,” said Frances Cheung, rates strategist at OCBC Bank.
The PBOC has taken a cautious approach to cash offerings since the start of this month, fueling market speculation as policymakers gradually exit crisis-mode monetary easing put in place during the COVID-19 shutdowns. It continued to trickle liquidity into the system as the end of the month approached.
The central bank injected 5 billion yuan ($740.42 million) into the banking system on Tuesday, leading to a net withdrawal of 431 billion yuan this month.
“The refinement of daily liquidity operations was aimed at guiding market rates smoothly close to the key rate,” said Ming Ming, head of fixed income research at CITIC Securities.
Traders and market watchers eagerly await this week’s Politburo meeting for more clues on policy direction, as the top decision-making body will discuss economic policies for the rest of the year.
“Excessive monetary easing will have a negative impact at a time when domestic inflation picks up,” said Marco Sun, head of financial markets at MUFG Bank.
Sun said investors would view the Politburo statement as a political signal.
Consumer inflation in June accelerated to 2.5% from a year earlier, although it remained within an upward target of around 3% and was well below of the global standard.
CITIC’s Ming said he did not expect the central bank to tighten liquidity conditions quickly or change policy stance, but said it may start to rein in the accumulation of leverage effect by gradually increasing short-term financing costs.
Official data showed that the total volume of repo transactions traded in the interbank market hit a record high of 6.83 trillion yuan on Monday, with overnight repo transactions accounting for 86 percent of turnover.
Investors generally take advantage of the ultra-low cost of the short-term financing tool to profit from their investments in government bonds.
($1 = 6.7529 yuan)
(Reporting by Winni Zhou and David Stanway; Editing by Himani Sarkar and Jacqueline Wong)