Shanghai (Reuters) – China’s key money market rate hit its lowest level in more than a year and a half on Tuesday. However, there was little sign of stress because there was a lot of cash available before the end of the month, when people needed cash the most.
Some market participants also wondered if the easy cash conditions would last, and they were looking to this week’s policy meeting for more information.
At around noon on Tuesday, the volume-weighted average of overnight repurchase agreements, or repos, that were traded on the interbank market dropped to 1.0183 percent. This was the lowest level since January 8, 2021.
Banks and businesses usually need more cash at the end of the month to take care of paperwork and make payments. This takes cash out of the banking system, which makes interest rates go up.
The seven-day repo only went up by 7 basis points on Tuesday, to 1.58 percent. This could help financial institutions get through the time when they need money the most.
It was a lot lower than the 2.1 percent reverse repo rate that the People’s Bank of China (PBOC) had for the same time period.
Frances Cheung, a rate strategist at OCBC Bank, said, “The market seems to have enough liquidity right now.”
Since the beginning of this month, the PBOC has been careful about how much cash it gives out. This has led the market to think that policymakers are slowly ending the crisis-mode monetary easing they did during the COVID-19 lockdowns. In the days leading up to the end of the month, it kept putting money into the system in small amounts.
The central bank added 5 billion yuan ($740.42 million) to the banking system on Tuesday. This means that 431 billion yuan have been taken out of the system so far this month, on a net basis.
Ming Ming, head of fixed income research at CITIC Securities, said that the changes to the daily liquidity operations were made to keep market rates close to the policy rate.
Traders and people who follow the market are looking forward to this week’s Politburo meeting, where the top decision-making body will talk about economic policies for the rest of the year.
“Excessive easing of the money supply will have some bad effects at a time when domestic inflation is going up,” said Marco Sun, head of financial markets at MUFG Bank.
Sun said that investors would look at the Politburo statement as a signal of policy.
In June, consumer inflation was at 2.5 percent, which was faster than it was a year earlier. However, it remained within the target range of around 3% and well below the global average.
Ming of CITIC said he didn’t think the central bank would quickly tighten liquidity conditions or change its policy stance. He did say, however, that it might start to stop a buildup of debt by slowly raising short-term financing costs.
According to official data, the total amount of repo traded on the interbank market reached an all-time high of 6.83 trillion yuan on Monday, with overnight repo trades accounting for 86 percent of the total turnover.
Most of the time, investors use the low cost of short-term financing to make more money from their investments in government bonds.
($1 = 6.7529 yuan)