SHANGHAI: China's main lending rates fell on Tuesday as the People's Bank of China skipped draining funds via open market operations to help meet large cash demand next week before the Lunar New Year.
China's central bank had said it would halt bill sales until after the end of the new year in late January, meaning it will inject 73 billion yuan ($11.56 billion) into money markets this week, even if does not take other steps to boost liquidity. The PBOC also said it could conduct reverse repo business if necessary to help inject money into the market.
Dealers said liquidity conditions were not too bad for now, as banks had hoarded cash before the new year holiday, which begins on Jan. 23. this year, but the key money rate was still hovering around the 4 percent-level.
A dealer at a Chinese commercial bank in Shanghai said banks were not likely to buy repos with maturities straddling the week-long festival, preferring to keep funds on hand to meet higher demand at this time.
"The central bank did not conduct a reverse repo today and because of the holiday factors, the money rate did not have much room to drop sharply," he said.
The benchmark weighted-average seven-day bond repurchase rate fell 41.93 basis points to 4.0997 percent by midday from 4.5190 percent at Monday's close.
Trading volume in the contract was at 54 billion yuan on Tuesday morning compared with 74 billion yuan at Monday's close, reflecting that cash demand remained limited for now, traders said.
Several dealers said that the suspension of central bank bill and repo issuance had sparked expectations banks' reserve requirement ratio might be cut to cushion a slowdown in the domestic economy.
Expectations of easier monetary policy were fanned after data on Tuesday showed China's imports and exports growth dipped to two-year lows in December.
Annual exports grew 13.4 percent in December, in line with forecasts, and imports growth slowed to a 26-month low of 11.8 percent, well below the 17 percent forecast.
But market players remained cautious over the timing of potential changes to monetary policy.
"This expectation always exists, but "when", is the biggest question," said a dealer at another Chinese bank in Shanghai.
The PBOC is expected to cut banks' reserve requirement ratios once in January, 80 percent of 23 banks and other financial institutions surveyed said, while 65 percent of them expected RRR could be cut twice in the month.
China's interest rate swaps rose slightly on Tuesday, with the benchmark five-year IRS rising 5 basis points to 2.98 percent.
Dealers said moves in the IRS rate could depend on liquidity conditions. If the central bank conducts a reverse repo in coming days, the rate may fall further.
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