SHANGHAI — China’s key money market rate touched a 1-1/2-year low on Tuesday, showing little sign of stress due to ample liquidity ahead of month-end peak demand for cash.
The elevated liquidity levels also prompted some market participants to wonder if the easy cash conditions would be sustainable as they were turning their attention to this week’s policy meeting for more guidance.
The volume-weighted average of overnight repurchase agreements, or repos, traded in the interbank market fell to 1.0183% by around midday on Tuesday, the lowest since Jan. 8, 2021.
Banks and companies usually have higher cash demand towards the end of the month to meet various administrative requirements and payment needs, which pulls cash out of the banking system to drive money rates higher.
The seven-day repo, which could help financial institutions tide over the peak period for funds, only rose marginally by 7 basis points on Tuesday to 1.5870%.
It was far below the People’s Bank of China’s (PBOC) reverse repo rate for the same tenor of 2.1%.
“Market liquidity appears adequate currently,” said Frances Cheung, rates strategist at OCBC Bank.
The PBOC has adopted a cautious approach to cash offerings since the beginning of this month, fueling market speculation policymakers are gradually exiting crisis-mode monetary easing delivered during COVID-19 lockdowns. It has continued drip-feeding liquidity into the system in the run-up to the month-end.
The central bank injected 5 billion yuan ($740.42 million) into the banking system on Tuesday, resulting in a withdrawal of 431 billion yuan on a net basis this month.
“The refinement in daily liquidity operations was meant to guide market rates smoothly close to the policy rate,” Ming Ming, head of fixed income research at CITIC Securities, said.
Traders and market watchers are anxiously awaiting this week’s Politburo meeting for more clues on policy stance, as the top decision-making body will discuss economic policies for the rest of the year.
“Excess monetary easing will yield some negative impact at a time domestic inflation picks up,” said Marco Sun, chief financial markets at MUFG Bank.
Sun said investors would scrutinize the Politburo statement a policy signal.
Consumer inflation in June quickened to 2.5% from a year earlier, though it remained within a target of an around 3% rise and was far below the global standard.
CITIC’s Ming said he did not expect the central bank to quickly tighten liquidity conditions or switch policy stance, but said it might start to curb a build-up in leverage by gradually raising short-term financing costs.
Official data showed that total trading volume of repo traded in the interbank market hit an all-time high of 6.83 trillion yuan on Monday, with overnight repo trades accounting for 86% of turnover.
Investors usually take advantage of the ultra low cost of the short-term financing tool to leverage their investments in government bonds for profits. ($1 = 6.7529 yuan)
(Reporting by Winni Zhou and David Stanway; Editing by Himani Sarkar and Jacqueline Wong)