SHANGHAI: Interbank liquidity remained plentiful in China's money market on Thursday, as relatively large central bank bill issuances in recent weeks are mainly the result of commercial bank demand rather than the central bank tightening monetary conditions.
The central bank mopped up a net 73 billion yuan ($11.46 billion) from the banking system this week, including 38 billion yuan in one-year bills, after a net drain of 101 billion yuan last week.
Yet, the market has shown few signs of concerns about a year-end liquidity squeeze.
The benchmark seven-day repo rate rose 23 basis points to 3.4533 percent at midday Thursday, effectively reversing Wednesday's 26 basis point fall. But the rate is still well below its November high.
The one-year interest rate swap rate fell 3 bps to 2.7800 percent at midday and is now down 20 bps over the last month.
Wednesday's release of data on new loans in November showed higher than expected credit growth, providing further evidence that policymakers have shifted towards looser monetary policy. Bank lending in China is subject to quotas and what analysts call "window guidance" by the government.
Another factor supporting short-term liquidity relates to the reasons for the central banks's recent open market operations.
The large volume of one-year bill issuances in the last two weeks largely reflects commercial bank demand, rather than the central bank's intention to withdraw funds, said an analyst with a foreign bank in Shanghai.
"This (large volume of bill issuance) is not really because the central bank wants to lock up so many funds," the analyst said.
Auction yields for central bank bills are higher than yields in the secondary market. Banks can earn profits by arbitraging the price spread between the primary and secondary markets, the analyst said.
Once banks offload their bills into the secondary market, they gain additional liquidity for either short-term lending or their own funding needs.
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