China money rates steady at low levels, market sees easy money ahead

SHANGHAI: China's money rates inched higher on Wednesday but remained at low levels, as post-holiday cash inflows and central bank foreign exchange purchases both supported liquidity.

The benchmark weighted-average seven-day bond repurchase rate inched up to 2.95 percent near midday, up from 2.91 percent at Tuesday's close. Levels below three percent typically indicate loose conditions.

The overnight repo rate remained at rock bottom levels, trading at around 1.89 percent, barely changed from 1.88 percent on Tuesday.

Despite a withdrawal of 860 billion yuan worth of liquidity this week due to maturing reverse repos, traders say funding conditions remain comfortable. The central bank drained an additional 30 billion yuan from the market through sales of standard repos on Tuesday.

The large volume of maturing reverse repos is the result of the massive injection of short-term funds by the People's Bank of China in the week just before the Lunar New Year holiday that began on Feb 9.

That was intended to stave off the holiday liquidity crunch that traditionally occurs as firms and households withdraw cash to pay for holiday bonuses and consumption.

But with the customer cash now flowing back into the system, traders say the maturing of those instruments and the modest additional withdrawal on Tuesday are doing little to dent liquidity. Base money creation through central bank purchases of foreign exchange inflows is also supportive.

Interest-rate swaps indicate the market expects rates to rise slightly but stay low.

The one-year interest-rate swap fixing was at 3.11 percent on Wednesday, slightly up from Tuesday's 3.10 percent, but still well below its recent peak of 3.40 on Jan. 4.