September 27, 2019 / 4:19 AM / 21 days ago

China's money market liquidity ample ahead of week-long holiday

SHANGHAI, Sept 27 (Reuters) - Liquidity conditions in China’s interbank money market improved toward the end of the quarter, though demand for cash picked up just days ahead of the week-long National Day holiday.

Ample conditions had prompted the People’s Bank of China (PBOC) to drain excess funds from the banking system at the end of the week, but traders expect financial institutions to have no problems meeting month-end requirements and the central bank’s quarterly health checks.

Short-term borrowing costs drifted lower. The volume-weighted average rate of the benchmark seven-day repo traded in the interbank market, considered the best indicator of general liquidity, was 2.4301% on Friday morning, about 37 basis points (bps) lower than the previous week’s closing average rate of 2.7994%.

The benchmark overnight repo continued to ease on Friday after hitting a 2-1/2-month low a day earlier.

“Interbank market liquidity was generally loose,” said a trader at a Chinese bank.

“And market sentiment was also stable following the PBOC’s continuous fund injections through 14-day reverse repos to ensure (cash conditions) after the National Day break.”

China’s markets will be closed from Oct. 1 to 7 to mark the 70th anniversary of the founding of the People’s Republic of China.

Cash demand from households and companies usually picks up ahead of the Golden Week holidays.

The PBOC injected a modest net 20 billion yuan ($2.80 billion) through reverse repo operations into the money market so far this week, down from a 50 billion yuan injection on a net basis a week earlier.

Market participants said the PBOC’s open market operations suggest it is unlikely to change its monetary policy stance any time soon.

PBOC Governor Yi Gang told a news briefing this week that China would maintain a prudent monetary policy stance and would not resort to “flood-like” stimulus.

“We agree with Governor Yi that China should avoid flooding its economy with too much liquidity,” Lu Ting, chief China economist at Nomura in Hong Kong, said in a note.

“Beijing should preserve some flexibility in policy tools, inflation is not a big threat despite surging pork prices, Beijing should control its macroeconomic leverage, and reforms are the key to lowing borrowing costs for the private sector.”

Lu added that room for policy easing is already very limited and Beijing should not be “too complacent about its policy easing space”.

China marginally lowered its new one-year benchmark lending rate for the second month in a row last week, following a cut in banks’ reserve requirements ratio (RRR), a step by the central bank to ease borrowing costs and support the economy as the Sino-U.S. trade war drags on. ($1 = 7.1337 Chinese yuan) (Reporting by Winni Zhou and John Ruwitch Editing by Jacqueline Wong)

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