SHANGHAI: China's money rates tumbled on Tuesday as the market fully digested the coming cut in banks' required reserve ratio announced on Saturday and weak economic data raised expectations for further easing.
The RRR cut will not take effect until May 18, but traders say liquidity has already noticeably increased. On Tuesday, the market was on pace for a heavier volume than on Monday, when it cautiously weighed Saturday's move.
The benchmark weighted-average seven-day bond repurchase rate fell 28.05 basis points to 2.8351 percent at midday, breaking through the key 3 percent barrier that market participants view as signaling easy money.
In the bond market, yields on benchmark one-year central bank bills fell to 2.9600 percent at midday Tuesday from 3.1903 percent at Monday's close.
The policy outlook, rather than a dramatic change in current market conditions, seems to be driving the fall.
With a spate of weak economic data released on Friday, traders say the market expects accommodative monetary policy to last through the third quarter.
"An interest rate cut this month or next now seems quite likely," said a bond trader at a Chinese brokerage.
Absent such action, however, rates are may not have much room to fall further.
"Rates will hold steady at this level, but there doesn't seem to be much more space for negative news," said the bond trader, referring to the phenomenon of weak economic data pushing yields down on expectations of policy easing.
Indeed, the central bank has already acted to smooth the impact of the roughly 420 billion yuan in funds that will be released into the market when the RRR cut takes effect.
The People's Bank of China (PBOC) drained 60 billion yuan through the sale of 28-day repos at its regular Tuesday auction, its largest repo sale since March 27.
With only 52 billion yuan in central bank bills and repos due to mature this week, Tuesday's action guarantees that the PBOC will conduct its first net drain since the week beginning March 19, barring the use of reverse repos.
Traders also point out that late May is normally a period of tight interbank liquidity, as firms are forced to pay supplementary tax payments for 2011 based on final calculations of their 2011 profits. State-owned enterprises also pay dividends in this period.
"In the next few weeks, the overnight and seven-day rates could reach yearly lows, but the increase in fiscal deposits will hedge the effect of the RRR cut," said Liu Pu, analyst at China Postal Savings Bank, in an interview published in the official China Securities News on Tuesday.