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China's benchmark overnight repo rate falls to record low

Published 07/02/2019, 02:35 AM
© Reuters.  China's benchmark overnight repo rate falls to record low

SHANGHAI/HONG KONG (Reuters) - One of China's main short-term borrowing rates fell to a record low on Tuesday as demand for cash eased at the start of the month and the financial system remained flush with funds.

Investors are closely watching to see if China's central bank continues to quietly guide interbank borrowing costs lower to boost the slowing economy.

But most market watchers believe the latest softening in rates is due to generous liquidity injected by authorities at the end of June to reduce the risk of a seasonal cash crunch.

China's benchmark overnight repo rate for banks fell to 0.70% on Tuesday, the lowest level since the data was first available in 2003.

The overnight borrowing cost was trading below the interest rate on commercial bank's excess reserves offered by the central bank, which now stands at 0.72%.

Ming Ming, head of fixed income research at CITIC Securities in Beijing, said liquidity conditions are likely to return to normal soon.

"Many financial institutions shored up their cash positions at the end of June...," he said.

"But given the central bank has started to withdraw short-term liquidity including a pause in the open market operations, the liquidity level will likely return to neutral in the following one to two weeks."

The People's Bank of China (PBOC) has skipped reverse repo operations, with maturing reverse repos draining a total of 240 billion yuan ($34.99 billion) so far this week.

If the central bank plans to skip the operations for the entire week, that will drain 340 billion yuan on a net basis this week.

"Front end rates will fluctuate along with the ever changing liquidity situation," said Frances Cheung, head of Asia macro strategy at Westpac in Singapore. "Further out, the curve the risk does appear to the downside. Rates should stay soft on the weak economic outlook and likely continued monetary policy support."

Premier Li Keqiang told the World Economic Forum in the northeastern Chinese port city of Dalian on Tuesday that China will make cuts in banks' reserve requirement ratios and seek to lower real interest rates to help reduce funding costs for small firms.

China will not need "very big" stimulus to prop up growth provided its trade dispute with the United States does not worsen, a central bank adviser said on Monday. The two sides agreed at the weekend to resume trade talks.

A trader at a Chinese bank said liquidity will moderate in mid-July as companies will start making their second-quarter tax payments, which should suck cash out of the system.

A second trader at a Chinese bank noted that the central bank used to drain money from cash-flush system through window guidance or by selling institutions with bond repos. But several traders said they had not seen any of these central bank actions so far in the market.

The volume-weighted average rate for overnight repos eased to a 10-year low of 0.9107%.

Separately, the weighted average seven-day repo fell to a four-year low of 1.8858% in morning trade.

In the offshore market, yuan funding costs also declined across different tenors.

The one-year CNH Hong Kong Interbank Offered Rate benchmark (CNH Hibor) was fixed at the lowest level since June 2015 on Tuesday, while six-month rate was at a near three-year low.

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