China's primary money rates fell sharply in the first week of 2019 as a year-end surge in cash demand abated and the central bank broadened the scope of targeted reserve requirement cuts. Those factors helped to outweigh the biggest net drain of liquidity by the People's Bank of China (PBOC) through its regular open market operations since October, as 430 billion yuan worth of reverse bond repurchase agreements issued before the new year matured.
The PBOC issued 110 billion in reverse repos this week, for a net 320 billion yuan drain. On Friday afternoon, 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 2.3606 percent.
That was 71.13 basis points lower than the previous week's closing average rate of 3.0719 percent. The Shanghai Interbank Offered Rate (SHIBOR) for the same tenor fell 15.8 basis points to 2.5630 percent, from the previous week's close of 2.7210 percent.
The one-day or overnight rate stood at 1.6325 percent and the 14-day repo stood at 2.1057 percent. Chinese Premier Li Keqiang raised the prospect of even more banking system liquidity Friday, saying that China will cut banks' reserve requirement ratios (RRRs), taxes and fees, with an eye on supporting small and private companies.
The statement comes after the PBOC on Wednesday announced a loosening of conditions on targeted RRR cuts, expanding the scope of such cuts. "The looser criteria may help some banks to meet the second-tier preferential RRR levels. We expect effective date of the 2019 inclusive finance targeted RRR cut to be around mid or late January, ahead of the Chinese New Year (CNY) in early February, to meet the large liquidity demand going into CNY," analysts at Citi said in a note.
A trader at a fund management firm in Shanghai downplayed the likelihood of a flood of new cash from the PBOC's latest move. "I don't think it's going to inject huge liquidity into the system this time," he said. He added that despite abundant existing liquidity reflected in low market rates, money was still not making its way to small and medium-sized enterprises. Instead, he said traders had been using excess liquidity to make long bets on Chinese government bonds in recent weeks.
On Friday, a Ministry of Finance auction of 10 billion yuan each of three- and six-month bills saw strong demand, with the yield on the three-month issue at 2.3115 percent and on the six-month issue at 2.3798 percent. The bid-to-cover ratio on the three-month bill rose to 4.42 from 3.56 at the last auction, and to 3.01 from 2.07 on the six-month bill. Yields for both auctions came in well below the benchmark yields of 2.4709 percent for three-month and 2.5001 percent for six-month Ministry of Finance bills.
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