SHANGHAI: China's money market rates slumped on Tuesday, with ample liquidity in the market offsetting the huge cash call from aggressive open market operations by the People's Bank of China.
The PBOC sold 99 billion yuan ($15 billion) of one-year bills in the operations on Tuesday, although it kept the auction yield of the bills unchanged.
The central bank also mopped up 100 billion yuan from the money markets via 28-day bond repurchase agreements.
Compared with 131 billion yuan in PBOC bills due to mature this week, the central bank is already set to conduct a net drain of 68 billion yuan from the financial system this week. It will conduct another regular weekly operation on Thursday.
"Banks have a huge amount of cash on hand, and their demand enabled the market to take the PBOC drain in stride," said a dealer at a Chinese commercial bank in Shanghai.
"The central bank may continue large drains on Thursday."
Traders said liquidity conditions may not turn tight in the coming couple of weeks because there are hundreds of billions of yuan worth of PBOC bills set to mature and foreign capital appears to be continuing to flow into China on a large scale.
But cash conditions in the market may change gradually in April, partly because of fewer PBOC bills and repos maturing.
China's benchmark money market rate, the weighted average seven-day bond repurchase rate , fell 17 basis points to 2.1321 percent at midday from 2.2989 at Monday's close, while the longest traded three-month repo rate tumbled to 3.7159 percent from 3.9000 percent.
Chinese interest rate swaps were largely stable on Tuesday, with the benchmark onshore five-year IRS unchanged at 3.94 percent at midday, while the offshore five-year non-deliverable IRS inched down 1 basis point.
Traders said IRS had dropped excessively in recent weeks as market expectations of more PBOC rate hikes eased and the market adopted a wait-and-see stance ahead of the PBOC's next moves.
The PBOC said in a report published after the market closed on Monday that China's money and credit growth were moving in line with policy goals, but it would maintain a tighter policy stance to put a lid on inflation.
"Until there are clearer signs of the next central bank tightening steps, the IRS market is likely to move narrowly in the near term," said a trader at an Asian bank in Shanghai.
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