China's primary money rates rose across the board for the week, driven by a combination of the central bank's reluctance to inject fresh funds into the banking system and a scramble for cash into year-end. Friday marked an unprecedented 36th straight trading day in which the People's Bank of China (PBOC) has skipped reverse repos operations.
But the bank lent 286 billion yuan to financial institutions via its one-year medium-term lending facility (MLF) on Friday, rolling over the same amount of maturing MLF loans. Without new liquidity to push rates lower, 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 2.6816 percent on Friday afternoon, about 13 basis points higher than the previous week's closing average rate of 2.5513 percent.
The 21-day contract, which usually helps financial institutions secure funds through the year-end peak season, surged to 3.4332 percent, the highest level since late June.
"Everyone has already started preparing for the year-end," said a trader at a Chinese bank in Shanghai. "Given the absence of reverse repos for such a long period of time, no one knows what could happen later (this month)." Traditionally, the Ministry of Finance increases its monthly distribution of deposits to firms and individuals who benefit from government programmes, lifting banking system deposits in late December. The market generally starts getting anxious about cash conditions in the last few days of the year.
A second trader at a different Chinese bank said this year's early tension in liquidity was largely due to worries over a squeeze on government revenue as Beijing seeks to boost the economy by cutting taxes.
Some analysts said investors have become more cautious this month over a myriad of factors including uncertainties over Sino-US trade negotiations and the US Federal Reserve's policy outlook.
Separately, Yi Gang, governor of the PBOC, said on Thursday that China's monetary conditions should be relatively loose to support its slowing economy. However, he warned against a sharp loosening, which could pressure the yuan exchange rate, and promised to keep the currency stable.
Also on Thursday, China's leadership said they would keep the country's economic growth within a reasonable range, heightening expectations for further government support and policy loosening.
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