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China overnight borrowing rates rise as traders see stimulus exit

SHANGHAI, Nov 11 (Reuters) - Rising overnight borrowing rates in China’s interbank market this week reflect tightening cash conditions as the quickly recovering economy gives the central bank room for a more flexible approach to monetary policy, traders and analysts said.

The overnight tenor of the Shanghai Interbank Offered Rate (SHIBOR) stood at 2.314% on Wednesday, the second day in a row it has exceeded the seven-day rate, though down from a two-week high touched Tuesday.

The volume-weighted average rate of the benchmark seven-day repo, considered the best indicator of general liquidity in China, was 2.3458% on Wednesday, up from 2.0098% a week earlier.

“It was quite hard to square books in morning trades in the previous two sessions this week as there was very little cash lent out by big banks,” said a trader at a Chinese bank.

The decline from Tuesday’s overnight rate came after the People’s Bank of China (PBOC) injected a net 30 billion yuan ($4.55 billion) into the banking system through its regular open market operations on Wednesday, the first daily net injection since Nov. 3.

The bank has drained a net 20 billion yuan so far this week.

The trader said market sentiment improved on Wednesday morning after the PBOC injection, even though the amount was relatively small.

A second trader at a Chinese bank said the market was worried about a possible tightening bias in the central bank’s prudent monetary policy stance following net cash drains in recent days, interpreting recent PBOC official comments as foreshadowing an exit from the emergency stimulus needed to offset a coronavirus-induced slump early in the year.

Senior officials from the People’s Bank of China (PBOC) said on Friday that the bank will consider policy changes and more flexible monetary policy as the economy recovers but won’t make any hasty moves.

Analysts at Nomura expect economic growth to accelerate to 5.7% in the fourth quarter from a year earlier, from 4.9% in the third quarter, though rising COVID-19 infections in Europe and the United States are clouding the global outlook.

“Specifically, we expect no new major easing measures to be announced in coming months, although Beijing is in no hurry to roll back existing stimulus measures,” they said in a note this week.

But market watchers caution that a clearer indication of the PBOC’s policy intent will have to wait for an expected rollover of medium-term lending facility (MLF) loans on Monday.

“We think the PBOC will maintain its current monetary policy stance. While the Chinese central bank will finally exit from crisis-related measures, (it’s) in no rush,” said Qi Gao, Asia FX Analyst at Scotiabank in Singapore.

MLF loans worth 400 billion yuan matured on Nov. 5, and a second batch worth 200 billion yuan is due to mature on Nov. 15.

($1 = 6.5969 Chinese yuan)

Reporting by Andrew Galbraith and Winni Zhou; Editing by Kim Coghill