China's primary money rates fell this week as cash conditions were loose with few signs of liquidity stress, even after the central bank drained the most cash in nearly two years. 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 2.7424 percent on Friday afternoon. That is nearly 18 basis points lower than the previous week's closing average rate of 2.9194 percent.
The People's Bank of China (PBOC), noting the banking system's "relatively high" levels of liquidity, has refrained from injecting cash via its open market operations for seven consecutive trading days, starting from January 25. In that period, there's been a net drain of 1.15 trillion yuan ($183.46 billion) due to maturing repos, including 760 billion this week - the biggest weekly one since late February 2016.
Traders said cash conditions were looser than expected, and the absence of reverse repos did not affect sentiment. Factors including the use of contingent reserve allowance (CRA), which lets some banks set aside fewer official reserves temporarily, has fueled the financial system with ample liquidity this week, according to traders.
The PBOC said in late December it would let some commercial banks temporarily keep fewer required reserves to help them meet heavy cash demand ahead of the Lunar New Year holiday. Gao Ting, head of China strategy at UBS Securities, said the loosened liquidity does not mean a change in the tone of financial regulation. "Money market rates will stay high ahead of the Chinese New Year holiday, with tighter liquidity for non-bank financial institutions (NBFIs) than for banks, as regulators are curtailing the flow of credit from banks to NBFIs to limit leverage," Gao said in a note.