SHANGHAI: China's primary money rates were up sharply for the week on tight liquidity after days of net fund drains by the central bank although pressure eased on Friday, traders said.
The People's Bank of China (PBOC) is controlling liquidity to curb potential risks and an expansionary monetary policy is unlikely to return in the near future, industry sources say.
Money conditions were "extremely tight" in the middle of the week, triggering a sell-off in the bond market, but supply and demand were more balanced and conditions slightly looser on Friday, traders said.
Chinese 10-year treasury futures for March delivery fell by the most in more than a year on Tuesday, and as of Friday afternoon the price was down 1.34 percent from last week's closing price.
The 10-year treasury yield rose 16 basis points to 3.05 percent from the previous week's close.
"Money conditions were largely tight in November, and a series of daily net drains through open market operations and seasonal factors piled on a lot of pressure in the middle of the week," the trader said.
The central bank injected a net 70 billion yuan ($10.17 billion) into the market through open market operations this week, compared with a net injection of 40 billion yuan a week earlier. However, the central bank drained funds for four straight days before a daily net injection on Thursday.
Adding to tight conditions, banks usually shore up their cash positions to meet regulatory requirements at the end of the month.
"But the central bank might not have thought the market was in need of urgent funds, and didn't roll out money through medium-term lending facilities as it used to do," the trader added.
Traders said the market was in consensus that the central bank would likely pump fresh funds into the system through medium-term lending facilities, or MLFs, when existing loans mature.
Some analysts were concerned that further yuan weakness would continue to drain base money out of the market.
Separately, yuan borrowing costs in Shanghai surged to a two-month high on tight liquidity.
The overnight Shanghai Interbank Offered Rate (SHIBOR) hit 2.3250 percent on Thursday, the highest since Sept. 30, when the rate surged to a 17-month high of 2.3270 percent. The rate fell back slightly to 2.3200 percent on Friday, snapping 16 straight days of gains.
The volume-weighted average rate of the benchmark seven-day repo traded in the interbank market, considered the best indicator of general liquidity in China, was 2.6560 percent, nearly 10 basis points higher compared with last week's closing average rate.
Copyright Reuters, 2016
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