SHANGHAI: China's money market rates fell on Wednesday, with ample liquidity in the market offsetting the cash call from the coming payments for a hike in bank reserve requirement ratios (RRR).
The abundance of cash might propel the People's Bank of China to conduct further aggressive open market operations on Thursday, traders said, as it goes all out to fight excessive liquidity in the financial system.
"It's difficult to lend out money today," said a trader at a Chinese state-owned bank in Beijing. "There is sufficient cash supply across tenors."
The PBOC announced an RRR hike on Friday last week, the third so far this year, which will come into effect on Thursday and freeze about 360 billion yuan ($55 billion) in bank reserves.
Still, China's benchmark money market rate, the weighted average seven-day bond repurchase rate , fell 11 basis points to 2.7242 percent at midday from 2.8374 percent at Tuesday's close.
The three-month repo rate tumbled to 1.8000 percent from 3.3484 percent while the shortest overnight repo rate edged down to 1.9130 percent from 1.9280 percent.
AGGRESSIVE DRAINS
The PBOC on Tuesday drained a combined 135 billion yuan via bill issuance and repo operation, more than the 109 billion yuan in bills maturing this week, meaning it has already conducted a net drain of funds for the week.
Given still ample liquidity in the system, traders expected the PBOC to conduct another major drain in its other regular weekly open market operations on Thursday. The central bank will announce the size of its Thursday bill sale on Wednesday and decide whether to conduct another repo operation on Thursday.
Chinese interest rate swaps were largely stable on Wednesday, with the benchmark five-year IRS inching up 1 basis point to 4.01 percent at midday. Most other contracts fell slightly.
The yield on the benchmark five-year government bond edged up 3 bps to 3.50 percent by midday, while the 10-year government bond rose 10 bps.
Traders said liquidity conditions may not turn tight soon because there are hundreds of billions of yuan worth of PBOC bills set to mature in coming weeks and foreign capital appears to be continuing to flow into China on a large scale.
The PBOC has flooded China's financial system with huge amounts of base money as it buys the bulk of foreign exchange inflows into the country to help maintain the stability of the yuan .
Over the past decade, the PBOC has mainly used open market operations to help sterilise excessive liquidity boosted by heavy capital inflows betting on yuan appreciation.
Since late last year, the central bank has also more frequently used RRR rises as a weapon to mop up money.
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