China's primary money rates ended Friday's session modestly lower from a week earlier and are set to stay down over the near term as authorities seek to support slowing growth. Traders said liquidity levels remained relatively loose despite the central bank making no net cash injections or withdrawals for an unprecedented third straight week.
A slight drop in money market rates reflected broad expectations of further policy loosening to shore up an economy beset by weakening domestic demand and headwinds from its trade war with the United States. Markets aren't expecting much progress on trade talks when presidents Xi Jinping and Donald Trump meet at a G20 summit in Argentina next week.
"The meeting should give an indication of how the trade war will develop, so for the time being the market is being fairly cautious," said a trader at a regional bank in Shanghai. The closely watched 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 2.5863 percent on Friday.
That was 1.6 basis points lower than the previous week's closing average rate of 2.6024 percent. The Shanghai Interbank Offered Rate (SHIBOR) for the same tenor fell just 0.1 basis point from the previous week's close, to 2.6280 percent. The one-day or overnight rate stood at 2.3379 percent and the 14-day repo stood at 2.5993 percent.
A second trader at a state-owned bank said mid-month demand for cash for corporate tax payments had lifted rates earlier in November. "Overall, rates have been consistently falling since then," he said. The regional bank trader noted that rates actually rose on Friday following steady declines over the course of the week.
"It's hard to know exactly what's driving the rise today, there's no clear factor. I can only say that profit taking pressure is significant as yields have fallen," she said. The Chinese government has been lowering reserve requirements and trying to stimulate lending to the private sector, and it is widely expected to try to keep rates down.
The increasing pressure on the Chinese economy prompted the Organisation for Economic Cooperation and Development to lower its forecasts for Chinese GDP growth in 2018 to 6.6 percent, from 6.7 percent previously, and in 2019 to 6.3 percent, from 6.3 percent previously. Taken together with weak credit growth data in China, signs of a slowing economy have raised expectations that Beijing will loosen policy further, potentially including its first cut to the benchmark 1-year lending rate since October 2015.
But falling yields threaten to constrain Beijing's options by putting pressure on the yuan as the United States prepares for further rate hikes. The yield on 1-year Chinese government bonds fell below the yield on 1-year US Treasury bills this week for the first time in 11 years, while the spread between Chinese and US 10-year government bonds has narrowed from 150 basis points at the end of 2017 to 33 basis points as of Friday.