China money rates fall on very loose liquidity

China's primary money rates fell this week as inter-bank money conditions remained extremely loose, with the central bank encouraging lending to bolster the economy amid slowing growth and a worsening trade environment.
With already-ample liquidity conditions, the People's Bank of China skipped its regular open market operations for a second consecutive week. Last week, it drained 210 billion yuan as that amount of reverse repurchase agreements matured.
No reverse repos matured this week, meaning the central bank neither injected nor drained cash from China's money markets through its open market operations. Faced with slowing economic growth at home and an increasingly uncertain external environment due to a worsening Sino-US trade spat, China has attempted to boost the economy by releasing more liquidity into the banking system, encouraging lending and promising more "active" fiscal policy.
The volume-weighted average rate of the benchmark seven-day repo traded in the inter-bank market, considered the best indicator of general liquidity in China, was 2.3082 percent on Friday afternoon.
That is 7.2 basis points lower than the previous week's closing average rate of 2.3806 percent. The Shanghai Inter-bank Offered Rate (SHIBOR) for the same seven-day tenor fell to 2.4260 percent, down 9.9 basis points from the previous week's close.
The one-day or overnight rate stood at 1.8171 percent and the 14-day repo stood at 2.1578 percent. Analysts from Guotai Junan Securities said in a note that the banking system being flush with liquidity follows a series of nominal cuts to reserve requirement ratios. But they added that the market situation illustrates the difficulty regulators face in trying to encourage banks to boost lending.
"The core reason (for ample banking system liquidity) is that loose money has not smoothly transmitted into loose credit," the analysts said. In a further indication of loose liquidity, the yields on negotiable certificates of deposit (NCD), a short-term debt instrument traded in the interbank market, were at their lowest levels on record.
The yield on AAA-rated three-month NCDs was 2.0 percent on Thursday, the most recent day for which there is data. That is its lowest-ever level, and is down 250 basis points since late-May. While pushing for more lending, policymakers have been keen to maintain China's multi-year effort to purge excessive levels of financial risk.
The country's state planner said this week that it would use more policy tools such as targeted reserve requirement ratio cuts to support debt-for-equity swaps this year as it seeks to curb corporate debt.