China's primary money rates fell for the week as liquidity improved following a resumption of the central bank's injection of funds. 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 2.6185 percent on Friday afternoon, nearly 6 basis points lower than the previous week's closing average rate of 2.6742 percent.
Traders said cash conditions were loose and market confidence has improved after the central bank resumed injecting cash through reverse bond repurchase agreements on Wednesday, following a hiatus of three weeks. The People's Bank of China (PBOC) injected a net 330 billion yuan ($48.18 billion) into interbank money market through open market operations this week, despite no reverse repo maturing during the same period. And there was no cash injection or withdrawal a week earlier.
The PBOC's fresh liquidity support was aimed at countering "factors related to tax payments and government bond issuance" to "maintain reasonably ample liquidity" in the banking system, it said in a statement this week. Some market participants said the amount of weekly injection via the bond instruments exceeded their expectations and were concerned that high liquidity levels could drag down borrowing costs further and pile additional selling pressure on the yuan.
China's yuan weakened against the US dollar on Friday, and was on course for a weekly loss, which would be its 13th in the past 14 weeks, as heightened trade tension between Beijing and Washington continued to weigh on market sentiment. David Qu, markets economist at ANZ in Shanghai believes that the central bank remained focused on the interest rate gap between China and United States and the implications for capital flows.
"The PBOC is expected to avoid a reversal of US-China interest rate spreads to avoid potential capital outflows, particularly as the USD remains strong and some EM currencies are experiencing fluctuations," Qu said. Qu added that financial markets have already priced in a very high possibility that the US Federal Reserve will raise the policy rate later this month.