China Main Money Rate Up, Market Awaits Next Bank Reserve Cut
China’s main short-term lending rate rose 14 basis points on Friday as banks hoarded money to prepare for extra bank reserve payments due early next month while the market awaited a cut in bank reserve requirements.
The benchmark seven-day weighted-average bond repurchase rate rose to 4.1240 per cent at midday from Thursday’s close of 3.9832 per cent.
The shortest overnight repo rate rose to 3.6038 per cent from 3.5666 per cent but tenors above 14-days fell on expectations that liquidity conditions may improve after July 5, traders said.
The market has recently suffered a liquidity crunch. It stemmed from the need by banks for more money to meet half-year regulatory requirements, such as loan-to-deposit ratios, and a large initial public offering that froze RMB31.0 billion (US$4.9 billion) from the market this week.
Also, Chinese banks are required to adjust their deposit reserves on the 5th, 15th and 25th of each month.
Traders said deposits recently have been rising sharply as banks are succeeding in attracting more savers to enhance their half-year financial statements. Higher deposits will increase the amount that banks must set aside as reserve payments on July 5, they said.
“Even major banks appear to have limited money to lend, keeping short-term funding costs at high levels,” said a dealer at a Chinese commercial bank in Shanghai.
“But the central bank is acting to help the market, and the market expects it to cut bank reserve requirements in July,” the dealer added.
The People’s Bank of China (PBOC) injected a net RMB198.0 billion into the market via regular open market operations this week, up sharply from a net injection of RMB55.0 billion last week.
Facing a worse-than-expected economic slowdown, the PBOC has cut reserve requirement ratios (RRR) twice this year, in February and May, and it reduced benchmark interest rates once, in June.
The moves were made partly because the slowdown has hit capital inflows into China and reduced money supply in the system.
The PBOC said earlier this month that it and Chinese financial institutions bought a net RMB23.4 billion worth of foreign exchange in May, following a net sale of RMB60.6 billion in April.
Average monthly net forex purchases in the first five months of 2012 was just RMB50.7 billion, down sharply from 2011’s average of RMB231.6 billion a month and the 2010’s average of RMB272.4 billion.
For about a decade, the PBOC’s injection of base money into the system via its purchase of foreign currencies flowing into the country to keep the yuan stable was the single main source of base money supply in China’s financial system.
The PBOC may await June’s economic data, to be announced in mid-July, to decide the timing of another RRR cut, traders said.
“Judging from the acute liquidity shortfall in the market, an RRR cut in July appears to be inevitable, and the PBOC may just want to choose a right time,” said a dealer at an Asian bank.