China's primary money rates fell this week as liquidity deepened at the start of a month and market sentiment improved after a net long-term cash injection led by the central bank. 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, fell during the week to 2.6864 percent on Friday afternoon.
That was about 26 basis points lower than the previous week's closing average rate of 2.9415 percent. Traders said higher cash demand at the end of May - like every month - had faded, and cash conditions were balanced, even with a loosening bias this week.
The People's Bank of China (PBOC) lent 463 billion yuan ($72.23 billion) to financial institutions on Wednesday via its 1-year medium-term lending facility (MLF), more than offsetting 259.5 billion yuan of such loans maturing the same day. "The higher-than-expected long term liquidity injection against the backdrop of rising default risk shows central bank's intention to ease market concern about the credit risk," OCBC Bank said in a note, referring to a spate of recent corporate bond defaults that prompted worries over credit conditions.
Analysts believe the PBOC's move may possibly push back another cut in banks' reserve requirement ratio (RRR), which unfreeze more liquidity for smaller lenders who do not have direct access to the central bank's liquidity facility.
Markets have generally expected another RRR cut in the second half after April's surprise reduction, with some speculation it could come as early as this month or July.
In the short-term the market focus will be the coming week's Federal Reserve's policy meeting, expected to produce a hike in US interest rates. Money market traders and analysts expect the PBOC to follow the suit by increasing interest rates of open market operations, as it has in the past.
"The PBOC will likely adjust the reverse repo rate by 5 basis points after the US FOMC hikes the Fed funds rate," economists at ANZ Bank said in a note on Friday. In open market operations, the PBOC drained a net 300 billion yuan this week following the previous week's net injection of 410 billon yuan.
Some traders worry the current high liquidity level is not sustainable as June often brings tighter cash conditions. Memories are still fresh of a cash crunch in June 2013 that sent money rates soaring and spooked global markets.