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China money rates tumble, PBOC operations in focus

SHANGHAI : China 's money market rates tumbled on Monday morning, with the benchmark seven-day repo rate falling 82 bas

Published July 11, 2011 Updated July 11, 2011 05:07am

2 min

By Imad Uddin

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The market is now watching how the People's Bank of China will conduct its open market operations this week for signs of a continuation or a temporary pause in the central bank's increase in bank requirement reserve ratios (RRR), which have become a monthly event since last November.

Many traders expect the PBOC may refrain from an RRR rise this month as money market rates are still at high levels despite Monday's falls, and because the central bank just raised official interest rates last week.

They forecast that the PBOC may reverse its net injection of money into the market over the past eight weeks and conduct a net drain via open market operations so as to return to the traditional way of using the operations to mop up excessive liquidity instead of another RRR hike.

"The market widely expects the PBOC may give the market some breathing space for better liquidity conditions," said a dealer at a Chinese commercial bank in Shenzhen.

"But no one is certain. Another RRR hike is still possible as the PBOC has surprised the market so many times recently."

In a sign of a possible continuation of its recent policy, central bank adviser Xia Bin said in an article published on Monday that China needed to continue monetary tightening policy, including using open market operations and RRR increases to mop up excessive liquidity.

For Monday, the seven-day repo rate fell to 5.3225 percent by midday from 6.1469 percent at the close on Friday. It was still high compared with a level of 3 percent that traders say is an acceptable rate for short-term funding.

The shortest overnight repo rate dropped to 4.0254 percent from 5.0064 percent and the 14-day repo rate fell to 5.3138 percent from 6.0024 percent.

Interest rate swaps were largely stable as last week's rate increase helped offset the impact of high inflation announced over the weekend.

The benchmark five-year IRS fell 11 basis points to 4.01 percent while the one-year IRS fell 3 bps but the 10-year IRS added 6 bps.

China's annual inflation in June accelerated to a three-year high of 6.4 percent, increasing the chances that the central bank will keep its monetary tightening policy.

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