The People's Bank of China on Tuesday conducted 14-day reverse bond repurchase business worth 169 billion yuan ($27 billion), temporarily injecting cash into the money market amid a liquidity squeeze ahead of the Lunar New Year holiday.
It also used such repos to help inject money into some smaller banks on Monday, with the amount not being disclosed but was estimated by some traders at about 100 billion yuan.
Still, the total injections were less than about 400 billion yuan that a central bank cut in banks' reserve requirement ratios (RRR) can supply. Talk of an RRR cut has been swirling in the market since mid-December.
Also, banks have to pay back money involved in the reverse repos shortly, while an RRR cut can permanently inject the money into the market, traders said.
"The market is very disappointed," said a trader at a Chinese commercial bank in Shanghai. "The PBOC appears to be acting to dampen too much speculation of a monetary policy easing, including RRR cuts."
The benchmark weighted-average seven-day bond repurchase rate jumped to 6.7556 percent by midday from 6.1644 percent at the close on Monday.
The shortest overnight one-day repo rate surged to 7.3841 percent from 5.5826 percent and the 14-day repo rate rose to 7.8155 percent from 6.4588 percent.
ECONOMY SLOWS
China's economy grew at its weakest pace in 2-1/2 years in the latest quarter and it appeared headed for an even sharper slowdown in the coming months as export demand fades and the housing market falters, data issued on Tuesday showed.
The fourth-quarter year-on-year growth of 8.9 percent, although slightly stronger than the 8.7 percent that economists polled by Reuters had predicted, may give Beijing yet another reason to gently ease monetary policy, most likely by reducing the RRR.
The central bank announced earlier this month that it would suspend bill sales and conduct reverse repo business to meet a cash shortage in the money market ahead of the Lunar New Year, the most important annual holiday in China that typically sees Chinese withdrawing money from banks for celebrations.
As money already injected into the market appears unable to fully relieve the acute liquidity shortfall, traders expect the PBOC to continue to conduct reverse repo business late this year, possibly on a larger scale.
In the longer term, the market squeeze is expected to ease after the holiday, but overall money supply to the financial system is expected to drop this year due to less capital inflows and the PBOC may have to use RRR cuts to help maintain comfortable liquidity conditions, traders said.
China's interest rate swaps were nearly flat on Tuesday, with a lack of fresh market-moving factors keeping the benchmark five-year IRS at 2.97 percent compared with Monday's 2.96 percent.