China's central bank injected medium-term cash into the banking system on Friday, effectively rolling over loans that matured on the same day, but short-term rates rose this week on reduced expectations for imminent loosening of cash conditions.
The People's Bank of China said it had lent 176.5 billion yuan ($25.80 billion) to financial institutions through its one-year medium-term lending facility (MLF). The bank left rates unchanged from the previous MLF operation, at 3.30 percent.
A batch of one-year MLF worth 176.5 billion yuan was set to expire on Friday. Ahead of the MLF operation, market expectations had spanned the spectrum from no injection to an injection exceeding the amount of maturing loans.
"Liquidity is still very ample. After the MLF rollover, expectations for another reserve requirement cut took a hit because it seems like a cut may be pushed back or not done at all. So rates at the short end have risen a bit," said a trader at a state-owned bank in Shanghai. "Today our expectation was for the MLF operation to exceed the amount of maturing loans, but it didn't," said another trader at an Asian bank in Shanghai. "Money is still very loose, but sentiment in the interest rate bond market is just average."
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 2.6725 percent on Friday afternoon, up 6.3 basis points from the closing average rate of 2.6097 percent on August 31.
The Shanghai Interbank Offered Rate (SHIBOR) for the same tenor rose to 2.6730 percent, up 4 basis points from the previous week's closing rate of 2.6330 percent. The one-day or overnight rate stood at 2.5861 percent and the 14-day repo stood at 2.7665 percent. Apart from the MLF injection, the PBOC did not inject any funds into the interbank money market for the week.
With no reverse repos maturing this week, that meant the bank did not inject or drain any funds on a net basis this week through its regular open market operations. "Marginal changes to liquidity is an unquestionable fact. One element is that the trend of central bank operations changing from large net injections to precise drip irrigation is very clear," analysts at Huachuang Securities said in a note.
"Another element is that consistent market expectations of continued loose liquidity are clearly starting to waver. A direct result of this change in expectations is a reduced willingness of banks to lend and a rise in money rates," the analysts said. The cost of insuring exposure to Chinese debt edged down, with the spread of the five-year credit default swap rate on Chinese sovereign debt dropping 0.7 percent from a week earlier to 59.58 basis points.