China's primary money rates hovered at elevated levels for the week and fell on Friday, although a small cash injection from the central bank reassured the market that the authorities' switch to a tightening of policy will be gradual. Cash conditions failed to improve this week, after the typical month-end peak demand for cash a week earlier, with some key market rates hovering at around two-year high.
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, closed at 3.1812 percent on Wednesday, not far from last Friday's closing of 3.1818 percent, the highest level since April 2015. The seven-day rate eased to 2.8823 percent on Friday, around 28 basis points lower than the previous week's closing average rate. The surge in the market rates came after a modest net cash injection through PBOC open market operations and in the absence of a medium-term lending facility (MLF) rollover, traders said, which dampened market sentiment.
They added that the move clearly reflected the authorities' intention to keep liquidity balanced, although with a tightening bias, in an apparent attempt to reduce leverage and risk in the financial system. The People's Bank of China (PBOC) injected a net 10 billion yuan ($1.45 billion) through open market operations this week, sharply down from a net injection of 70 billion yuan a week earlier.
The weekly net injection was the lowest in a month, and the PBOC skipped two days of operations this week, attributing its absence to "appropriate" liquidity in the banking system. In addition, the PBOC held back from rolling over 230 billion yuan worth of six-month medium-term lending facility loans that matured on Wednesday. Traders and analysts expect the central bank to extend the maturing MLF loans in the near term, with some saying the PBOC might decide to roll over the loans when another batch falls due on May 16.
"We expect China's central bank to provide new MLF loans in the coming future to manage market expectations," Scotiabank said in a note. A batch of 179.5 billion yuan of six-month MLF loans is due to mature on May 16. The liquidity squeeze drove the bond yields higher. The benchmark 10-year treasury yields climbed to 3.572 percent on Friday, around 10 basis points higher than the previous week's close of 3.477 percent. The Shanghai Interbank Offered Rate (SHIBOR) for the seven-day tenor fell to 2.9186 percent, nearly five basis points higher than the previous week's close.