China's key money rates spiked for the week as the central bank conducted its biggest drain in nearly two months, tightening liquidity as it extends its campaign against riskier types of financing. While conditions eased slightly on Friday, analysts said tighter cash conditions had forced the non-bank financial institutions to deleverage as those lenders usually use short-term funds to meet their leveraged investment needs.
The volume-weighted average rate of the benchmark 14-day repo traded in the interbank market, considered one of the best indicators of general liquidity in China, surged to its highest in five months on Wednesday. The 14-day repo eased on Friday, trading at 4.1625 percent by 0636 GMT.
The 7-day repo rate also rose for the week and stood at 2.9344 percent on Friday afternoon, more than 6 basis points higher than the previous week's close. In open market operations, the People's Bank of China (PBOC) refrained from injecting net funds into the money market for the entire week, draining a net 330 billion yuan ($49.52 billion) in five days - matching the amount drained in the last week of June.
The PBOC said in a statement that liquidity in the banking system was "appropriate" following factors including liquidity injection from "fiscal expenditure, deposit auctions and refund of financial institutions' reserve payment" to counter maturing reverse repos. A trader at a Chinese bank said cash conditions were "very tight" in the middle of the week but improved on Friday, expecting the situation to remain tight for the remainder of the month. Several traders said the market will focus on open market operations next week as the finance ministry is due to roll over 600 billion yuan worth of special treasury bonds due on August 29, when the PBOC may inject additional funds.