China's primary money rates eased this week after a reduction in banks' reserve requirements went into effect and offset a central bank-led cash drain. 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 3.0015 percent on Friday afternoon, around 4 basis points lower than the previous week's closing average rate of 3.0441 percent.
The People's Bank of China (PBOC) said its reduced requirements for bank reserves, which came into effect on Wednesday, freed up around 400 billion yuan ($63.09 billion). The RRR cut released a total of almost 1.3 trillion yuan, out of which 900 billion yuan had been used by the banks to repay their respective outstanding medium-term lending facility (MLF), the PBOC said in a statement.
The central bank also reiterated that its prudent and neutral monetary policy stance "remained unchanged" and said overall liquidity in the banking system was "basically not changed".
Traders said PBOC's open market operations matched its claims as it drained a net 270 billion yuan so far this week via reverse repos, striving to keep cash conditions balanced, even with a slightly tightening bias. Although cuts in the reserve requirement ratio (RRR) were widely considered as easing, economists viewed the latest reduction for replacement of outstanding MLF loans as credit reallocation.
David Qu, market economist at ANZ said the RRR cut was to normalise the PBOC's balance sheet and reduce bank's marginal funding costs. "We believe the PBOC will continue to cut the RRR by another 1 percent in H2 2018," Qu said, suggesting there was still room for further cuts to offset the outstanding MLF loans as RRR is no longer the only monetary policy tool available. The outstanding MLF loans stood at 4.917 trillion yuan at the end of March, according to Reuters calculations based on official data.
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