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China’s primary money rates were up again this week, although they eased slightly by Friday, driven up by signs of tight liquidity due to seasonal cash demand, traders said.
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 2.6016 percent, hitting a high of 2.6624 percent on Thursday, 4.73 basis points higher than the previous week’s closing average rate.
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Money supply was tight despite a net cash injection by the central bank through its open market operations, which was overtaken by high month-end seasonal cash demand, traders said, tipping that corporate tax payments had probably drained around 500 billion yuan ($73.76 billion).
Companies usually pay their third-quarter taxes in October, and Monday was the deadline to submit their tax payments. “Although the central bank has net injected cash, it really did little to relieve the tight liquidity,” said a Shanghai-based trader at a Chinese bank.
“But the worst of the liquidity crunch should be over now,” the trader said, expecting cash conditions in the market to improve albeit still retaining a tightening bias next week. The People’s Bank of China injected a net 595 billion yuan into the market through open market operations this week, compared with a net injection of 95.5 billion a week earlier.
Still, absence of the medium-term lending facility (MLF) operation piled additional pressure liquidity conditions. A batch of 166 billion yuan of MLF loans matured on Tuesday, according to Reuters calculations based on the central bank data, but the PBOC did not extend the loans.
The MLF is a supplementary policy tool the central bank uses to manage liquidity conditions and medium-term interest rates in the banking system and money markets. On Monday, the country’s finance ministry auctioned 80 billion yuan of three-month deposits at an average yield of 2.95 percent, up from previous auction’s 2.55 percent. The market interpreted it as another sign that the central bank was unwilling to lend out cheap funds.
In recent weeks the central bank has also reintroduced the use of longer tenor, more expensive reverse repo operations in what traders and analysts say is an effort to reduce dependence on cheap overnight borrowing and curb leverage in the bond market.
Chinese ten-year treasury futures for December delivery sold off on Monday by the most since August in another sign of tightening liquidity, as investors took profits after a sharp run-up in government debt and traders eyed suspected currency market intervention by state banks to support the yuan.
The Shanghai Interbank Offered Rate (SHIBOR) for the seven-day tenor rose to 2.4150 percent, 1.4 basis points up from the previous week’s close.