China's money rates fall after year end

China's primary money market rates dropped this week as demand for funds eased after peak cash demand at the end of the year. The volume-weighted average rate of the benchmark seven-day repo traded in the interbank market, considered the best indicator of general liquidity in China, was, about 41 basis points lower than the previous week's closing average rate of 3.0912 percent.
Liquidity conditions loosened in the first week of the new year as cash demand due to seasonal factors fell sharply, despite the central bank refraining from injecting fresh funds into the market. The central bank has maintained that liquidity in the banking system is "relatively high" and is sufficient to absorb maturing reserve repos.
In open market operations, the People's Bank of China (PBOC) has drained a total of 510 billion yuan ($78.6 billion) this week, compared with a net drain of 290 billion yuan a week earlier. Still, the respite may be short. Traders expect liquidity worries will start to resurface from the middle of this month as seasonal factors start to kick in again.
Financial institutions will have to make quarterly tax payments, required reserve payments and other regulatory payments in mid-January, which are expected to suck funds out of the market. In addition, two batches of medium-term lending facility (MLF) loans with a total volume of 289.5 billion yuan are set to mature in January, with the first batch of 182.5 billion yuan expiring on Jan.13.
Xie Yaxuan, an analyst at China Merchants Securities, said funds released from a previously announced reduction in the targeted banks' official reserves (RRR) could partially offset the large amounts of maturing loans. China's central bank said in late September that it would cut the reserve requirement ratio (RRR) for some banks by at least a 50 basis point that meet certain requirements for lending to small business and the agricultural sector, starting 2018.
In a pre-emptive move, the People's Bank of China (PBOC) also announced steps last week to reduce market jitters usually seen ahead of the long Lunar New Year holidays, which fall in mid-February this year. The PBOC central bank will let some commercial banks temporarily keep fewer required reserves to help them cope with the heavy demand for cash ahead of the holiday, a step that analysts say does not signal any shift in its recent policy toward gradual tightening.
Separately, sources told Reuters on Thursday that China's financial authorities have published new rules to regulate bond trading, with a focus on restricting leverage and banning under-the-table deals designed to skirt regulations.