Mainland money rates up as PBOC drains market
China’s money market rates rose sharply on Thursday after the People’s Bank of China conducted aggressive open market operations, setting it on course to drain money from the system this week, traders said.
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Reuters in Shanghai
17 November 2011
China’s money market rates rose sharply on Thursday after the People’s Bank of China conducted aggressive open market operations, setting it on course to drain money from the system this week, traders said.
The PBOC auctioned 6 billion yuan (HK$7.3 billion) of three-month bills on Thursday, ending the week with a net drain of 2 billion yuan from the market compared with a net injection of 67 billion yuan last week.
The central bank is apparently acting to cool excessive expectations that the government will reverse its tight monetary policy put in place since October last year, despite the fact that it has paused tightening steps since July.
In a policy report late on Wednesday, the PBOC said China stood ready to fine-tune monetary policy if needed but its overall stance would stay prudent, furthering the view of analysts that Beijing is switching its focus to support a slowing economy.
But investors positioning for a dramatic policy loosening may have to revise their expectations as the central bank made clear it would not relax its fight against rising prices, even as it sees consumer inflation cooling.
“The PBOC’s aggressive open market operations and its policy report on Wednesday dampened bullish sentiment that the government will loosen monetary policy soon,” said a trader at a commercial bank in Shanghai.
“As investors now expect liquidity conditions not to be optimistic as they had expected, even some major banks were borrowing money in the money market today.”
The benchmark seven-day government bond repurchase rate rose 19 basis points to 3.5550 per cent at midday from 3.3636 per cent at Wednesday’s close.
The overnight repo rate jumped to 3.2433 per cent from 2.9336 per cent while the 14-day repo rate rose to 3.6730 per cent from 3.4043 per cent.
China’s interest rate swaps were little changed at midday, with the curve remaining relatively flat as a lack of cash flow kept the one-year IRS at a high level, traders said.
One-year IRS, a gauge of short-term liquidity, ended the morning up 3 bps at 3.04 per cent. The benchmark five-year IRS inched up 1 bp to 3.22 per cent while the 10-year IRS also edged up 1 bp to 3.32 per cent.
The PBOC has not raised RRR and interest rates since July as the euro-zone debt crisis threatens global economic growth while China’s inflation eases from a three-year peak reached in July.
The market widely expects the central bank will gradually ease monetary policy, possibly with a loosening of liquidity controls late this year, followed by interest rate cuts next year.