China's primary money rates fell this week despite end-of-month demand, as Beijing stepped up efforts to encourage lending to weaker companies amid rising defaults. The country's central bank lent more firepower to the push for easier credit on Friday, unexpectedly injecting more medium-term cash a day after more tit-for-tat Sino-US trade tariffs came into effect.
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 2.5777 percent on Friday afternoon.
That is 7 basis points (bps) lower than the previous week's closing average rate of 2.6480 percent.
The Shanghai Interbank Offered Rate (SHIBOR) for the same tenor fell to 2.6120 percent, 3.80 bps lower than the previous week's close of 2.6500 percent.
The one-day or overnight rate stood at 2.3742 percent and the 14-day repo stood at 2.6574 percent.
Money rates typically rise at month-end as financial institution demand for cash for regular tax payments picks up. But the People's Bank of China kept liquidity relatively loose, injecting a net 40 billion yuan ($5.82 billion) for the week, after injecting 130 billion a week earlier.
On Friday, the PBOC eased conditions further by injecting 149 billion yuan into markets via its one-year medium-term lending facility (MLF), with the interest rate unchanged.
While traders said the move had been rumoured and priced into the market by Friday morning, it still came as a surprise because the PBOC has in the past typically only injected liquidity through MLF loans on days existing loans were set to mature.
No MLF loans matured on Friday, but the PBOC said in a statement that the injection was meant to offset government bond issuance and maturing reverse repos.
Finance Minister Liu Kun told Reuters that he expects bond issuance by local governments to support infrastructure investment to exceed 1 trillion yuan in the first three quarters of this year as part of a more "proactive" fiscal policy.
The PBOC said that Friday's MLF injection would help to "strengthen coordination of monetary policy and fiscal policy" to maintain "reasonably ample" liquidity in the banking system.
The MLF injection also followed comments from the central bank on Tuesday that it would keep liquidity reasonably ample but not resort to strong policy stimulus.
The State Council, China's cabinet, said on Wednesday that China would encourage financial institutions to boost loans to smaller firms, also without resorting to strong policy stimulus.
"Monetary policy is still emphasizing avoiding excessive liquidity and will put more emphasis in the future on policy transmission mechanisms," Huachuang Securities analysts wrote in a note.
"Leaders feel that the credit crisis of smaller companies has not been solved yet, so they're forcing banks to take money and lend it to small enterprises," said a trader at a state-owned bank in Shanghai.
But the effectiveness of such moves is far from clear.
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