China's money rates fall

China's primary money rates fell this week as the central bank pumped cash into the banking system, and as it prepared to soften small firms' financing burdens in an attempt to hold off risks posed by a US-China trade war. On Friday, the People's Bank of China (PBOC) skipped its regular open market operations, bringing total injections into the country's interbank market for the week to 540 billion yuan ($79.80 billion), the largest net weekly injection since February.
The operations added cash to what several traders said has been already ample liquidity in the market in recent weeks, driving rates down. 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 2.6243 percent on Friday afternoon, 2.2 basis points lower than the previous week's closing average rate.
The Shanghai Interbank Offered Rate (SHIBOR) for same tenor fell to 2.6750 percent, 1.1 basis points lower than the previous week's close. The one-day or overnight rate stood at 2.3277 percent and the 14-day repo stood at 2.8583 percent.
This week's net injection comes as the PBOC is seen preparing to further enhance market liquidity levels and channel credit to small and medium-sized firms, with a hot trade war between the US and China threatening to further slow China's growth in the coming months. The central bank is expected to boost liquidity of commercial banks to drive lending and to encourage them to buy bonds from entities like enterprises and local government financing vehicles. It has also been encouraging commercial banks, especially those who have invested in lower-rated bonds, to tap its Medium-Term Lending Facility (MLF).
These moves are expected to lend a hand to smaller firms that have struggled for financing amid a multi-year deleveraging campaign, though a fixed-income analyst at a domestic securities firm said it revealed a central tension of government policy making.
"It's a battle between fiscal policy and monetary policy," said the analyst, who asked not to be named as he is not authorised to speak with media. Under the influence of looser liquidity, yields on short-term interbank debt have fallen to levels last seen in 2016.
On Thursday, the most recent day for which data is available, the yield on 3-month negotiable certificates of deposit (NCD) was at 3.45 percent, down 185 basis points from the end of 2017. Li Qilin, an analyst at Lianxun Securities, said in a note that the main impetus behind falling NCD rates was strong market demand. "One factor is the impact of real loosening of liquidity and expectations of future loosening have had on short-end rates, another is that after the strengthening of financial regulations, the trend of institutional investing to shorter and more conservative investments has led to increased allocation in NCDs," he said.