China Repo Rate Drops

China’s seven-day repo rate edged lower on Monday following a signal from the central bank that it will maintain ample liquidity in the near term.    

Dealers believe the central bank sent a clear signal that it will keep market money conditions relatively relaxed by injecting funds via unexpected seven-day reverse repos on May 3, even though liquidity was already seen as adequate.    

The move saw the People’s Bank of China injected 65 billion yuan ($10.3 billion) into the banking system at a yield of 3.53 percent.     

“Actually, the money supply is not tight in the market for now, but money rates are artificially high,” said a dealer at a Chinese commercial bank in Shanghai.     

“The reverse repo rate sends a signal that the central bank intends to keep the money rate around 3.5 percent,” he said.    

The weighted average of the benchmark seven-day repo rate edged down to 3.7548 percent from Friday’s close of 3.8412 percent.    

But the decline in money rates still did not meet market expectations, given that banks are required to pay extra cash into escrow at the central bank on Monday to meet their reserve requirement ratios (RRR). Most market players believe supplying liquidity via open market operations, as opposed to adjusting reserve-requirement ratios at banks, provides only short-term liquidity.      

The decision to use reverse repos to inject liquidity implies that the central bank is less likely to cut the RRR in the near future, dealers said.     

Some traders still believe regulators may cut the RRR towards the end of May, however.    

The one-day rate was little changed at 2.9696 percent from 2.9652 percent, while the 14-day repo rate rose to 3.8949 percent from 3.8148 percent.    

Market players said money rates may fall slightly in the near term after the deadline passed on Monday for banks to make a regular payment towards their extra reserve requirements.    

Chinese interest rate swaps fell on Monday, but the market remained divided over the timing of a possible cut in bank reserve requirement ratios (RRR) by China’s central bank to improve business conditions amid a slowing economy.    

By midday, the benchmark five-year IRS fell 3 basis points to 3.41 percent. One-year IRS edged down 1 bp to 2.30 percent while the 10-year IRS fell 5 bps to 3.60 percent.

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