SHANGHAI: China's short-term lending rates were largely stable on Tuesday after the People's Bank of China sent a strong signal that it was not easing monetary policy, helping to set a floor on money market rates, traders said.
The central bank drained 10 billion yuan ($1.6 billion) from the market through 28-day bond repurchase agreements on Tuesday after it also signalled that it would resume bill sales in its regular open market operations on Thursday.
No central bank bills and repos are due to mature this week, meaning that Tuesday's drain guarantees a net drain of at least 10 billion yuan this week.
The PBOC has suspended bill issues in its regular open market operations since late last year in a move to help the market tide over a shortfall in flows due to factors such as cash calls during the Lunar New Year in late January.
However, the benchmark seven-day repo rate dropped a combined nearly 200 basis points on Friday and Monday after the PBOC conducted its first cut in bank reserve requirement ratios (RRR) this year, which took effect on Friday and injected about 400 billion yuan ($63.5 billion) into the financial system.
The RRR cut, aimed at compensating for less base money in the system due to less capital inflows into China, has sparked speculation in some circles of monetary easing.
The central bank appears to have acted quickly to dampen such speculation via signals it has sent about its open market operations, traders said.
"Overall, market liquidity conditions remain loose," said a trader at a major Chinese securities brokerage in Shanghai. "But the PBOC's move has caused some caution, with banks tending to hoard more money than they need to cope with emergency."
The weighted-average seven-day bond repurchase rate inched down 0.34 bps to 3.6606 percent at midday from 3.6640 at the close on Monday.
The one-week SHIBOR rate, a barometer of banks' willingness to lend, modelled after LIBOR, edged up 0.83 percent.
China's interest rate swaps were mixed on Tuesday, with the benchmark 10-year IRS rising 9 bps to 3.53 percent by midday amid mounting disappointment over a smaller possibility of monetary easing, traders said.
IRS have largely moved sideways for the past two weeks after they jumped earlier this year in response to signs an aggressive PBOC monetary easing to boost the economy may not happen in the first quarter, traders said.
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