SHANGHAI: China's money rates eased up this week after the central bank poured cash back into the market following an unusual mid-month spike last week, but traders remained on edge with rates elevated
The weighted average for the benchmark seven-day bond repurchase contract stood at 4.88 percent on Friday afternoon, down from 5.45 percent at the previous Friday's close.
But the rate was still well outside the 3 percent range traders consider indicative of comfortable conditions.
The 14-day repo and overnight repo rates posted similar declines.
The cause of the market jitters is twofold.
Traders say banks and other participants in the interbank market have hunkered down and held cash on concerns that the People's Bank of China (PBOC) is set to tighten short-term money conditions going forward through open market operations.
By reducing the cash supply on a weekly basis, the central bank hopes to reduce inflationary pressure and calm housing markets -- which have been stimulated by strong hot money inflows into China in recent months -- without crimping healthy growth in other parts of the economy.
Indeed, interest rate swaps based on the 1-year fixed deposit rate are still not pricing in a rise in benchmark deposit rates.
The PBOC and commercial banks purchased 441.6 billion yuan ($72.47 billion) worth of foreign exchange on a net basis in October, up sharply from September's 126.4 billion yuan, indicating strong inflows seeking to capitalise on a strengthening yuan. A byproduct of these flows has been a flood of liquidity into the interbank market.
In addition to concerns that mild tightening is under way, there are signs of a secular trend pushing up yields in Chinese debt capital markets across the board: economic reform.
Chinese bond prices have been hammered in recent days on expectations that reforms to loosen government control of interest rates will cause funding costs to rise.
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