China's primary money rates fell over the week as there was little sign of liquidity stress so early in the month, despite the central bank continuing to refrain from injecting fresh funds into the interbank market. Traders said liquidity remained ample in early November, but tcompanies will start making monthly tax payments next week, taking cash out of the system.
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 2.5511 percent on Friday afternoon. It was 5 basis points lower than the previous week's closing average rate of 2.6020 percent, and largely flat compared with the borrowing cost of 2.55 percent charged by the central bank in the primary market.
The People's Bank of China (PBOC) skipped reverse repos operations for the entire week while lending 403.5 billion yuan to financial institutions via its 1-year medium-term lending facility (MLF) on Monday, effectively rolling over the same amount of such loans expired on the same day. "This suggests the PBOC does not intend to inject further liquidity to push down funding rates, as they have fallen to comfortable levels, and further action will depend on economic and market conditions," said Gao Ting, head of China strategy at UBS Securities
Gao expects the central bank to maintain flexibly using its reverse repos to keep the seven-day rate at 2.6 percent. Yi Gang, governor of the People's Bank of China was quoted by state media as saying this week that China's overall liquidity is ample after four targeted required reserve ratio cuts this year.
"There is a lot of water in the pool, and the liquidity is reasonably abundant," Yi told the state-owned Economic Daily in an interview. Some money market traders and analysts expect Yi's pledge to step up funding support for cash-strapped private firms meant interbank borrowing costs would be kept low.
"While the governor stated there is no change in the overall monetary policy stance, which is described as prudent, and more support for the real economy via more bond issuance had been stated previously, his comment on past policy missteps suggests a change in policy stance to us," economists at Goldman Sachs said in a note.
"Rather, we think the reiteration of the current policy stance should be read more as an indication that the PBOC will be measured in terms of the size of additional loosening. In terms of more tangible measures, we now see a higher probability that total social financing (TSF) growth will accelerate from now, but likely at a very measured pace."
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