China money rates slip after PBOC lowers official yield

SHANGHAI: China's money rates fell slightly on Tuesday after the central bank lowered the yield at its bond repurchase agreement auctions the second time since July, as part of an effort to lower real funding costs in support of a slowing economy, traders said.

The People's Bank of China (PBOC) on Tuesday lowered the yield of the 14-day bond repurchase agreements during open market operations to 3.4 percent, down from 3.5 percent in its previous operations last Thursday. In the money markets, the weighted average of the benchmark seven-day repo rate dropped 6 basis points to 3 percent by late morning.

The average of shortest one-day repo rate slipped 1 basis point to 2.53 percent, while the 14-day repo rate fell 3 basis points to 3.29 percent.

Traded rates have remained lower than official rates this year because liquidity conditions in the open markets remain accomodative, traders say, but even though market rates are below the official rate, investors still closely watch the PBOC's official yield as a form of forward-looking pricing guidance from the central bank.

"The PBOC is guiding funding costs lower as the markets appear to have largely failed to respond to related government appeals," said a dealer at an Asian bank in Shanghai.

"So we see the potential for costs of corporate medium- and long-term borrowing to drop in coming months, although the room for short-term money market rates to fall is limited as the rates are already at low levels," she said.

This is the second time since July that the PBOC has lowered the official yield for its repos, a sign that the central bank is trying to keep market interest rates relatively low, while the market widely expects China to post a slew of weak economic data for the third quarter this and next week.

The PBOC also drained 20 billion yuan ($3.27 billion) from the money markets through 14-day repos on Tuesday.

Maturing bills and repos will inject a net 40 billion yuan into the banking system this week. The central bank will conduct its next regular open market operations on Thursday.