China's primary money rates were mixed for the week, as a central bank-led net cash injection offset some of the liquidity pressure caused by corporate tax payments. 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 2.8432 percent on Friday afternoon, nearly five basis points lower than the previous week's closing average rate.
Traders said overall cash conditions were balanced with a tightening bias, and monthly corporate tax payments sucked come cash out of the market. They added that demand for loans with 14-day or longer tenors was high as these would help banks get through the month-end when cash demand peaks. Rising demand drove the 14-day rate to 4.1509 percent on Friday afternoon, almost 37 basis points higher than the previous week's close.
This week, the People's Bank of China (PBOC) made a net injection of 160 billion yuan ($23.21 billion) through its open market operations. One week earlier, it drained a net 120 billion yuan. The market interpreted this week's net injection - the biggest in a month - as authorities ensuring the economy is not choked of funds while they continue to clamp down on financial risks. The PBOC did not inject any cash through 28-day tenor in the open market operations this week, following its claim that such a tenor would be used when signs of pressure emerge in the future.
"The central bank will mainly conduct reverse repos through seven-day tenor in a period of time going forward, but will opt to use other tenors when temporary and seasonal factors weigh on the cash conditions," the PBOC said in its first quarter monetary policy report, issued on May 12. It added that for medium-term lending facility (MLF) operations, it will mainly inject funds with one-year tenor while also using other tenors if needed to better meet mid- to long-term liquidity demand at financial institutions.
"The short-term cash injection through reverse repos suggested that the central bank is still very strict on the total amount of funds in the market," said a trader at a Chinese bank in Shanghai. "The PBOC wants to strengthen its management of the total liquidity."
Separately, the central bank did not roll over a batch of six-month tenure 179.5 billion yuan MLF loans that matured Tuesday, as it provided 459 billion yuan via such loans on May 12, more than compensating for the MLF loans maturing this month. A 230 billion yuan loan with six-month tenure matured on May 3. The Shanghai Interbank Offered Rate (SHIBOR) for the seven-day tenor rose to 2.8800 percent, three basis points higher than the previous week's close.
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