China money market shrugs off massive drain, benchmark rate slides

SHANGHAI Tue Apr 15, 2014 5:07am EDT

A U.S. $100 banknote is placed on top of 100 yuan banknotes in this picture illustration taken in Beijing May 7, 2013. REUTERS/Petar Kujundzic

A U.S. $100 banknote is placed on top of 100 yuan banknotes in this picture illustration taken in Beijing May 7, 2013.

Credit: Reuters/Petar Kujundzic

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SHANGHAI (Reuters) - China's key money rates fell on Tuesday morning as dealers in the interbank market ignored a massive 178 billion yuan ($28.62 billion) drain by the central bank during open market operations, the largest single-day drain since February.

The weighted average seven-day bond repurchase agreement rate stood at 3.4176 percent by mid-morning, down from 3.5238 percent at Monday's close.

Traders said there was enough liquidity in the market to keep downward pressure on rates, even as the People's Bank of China (PBOC) vacuumed up excess cash.

"The market reaction to the drain wasn't much, because actually money's not in short supply, and in addition if you look at the auction of deposits this morning, the net effect was a cash injection," said a dealer at a city commercial bank in Shanghai.

Zhou Hao, economist for ANZ Bank in Shanghai, said that the market was waiting for aggregate money supply data this morning, and predicted that the PBOC would keep rates low if new loans and M2 growth come in below expectations.

"While the size of repos is larger than expected, the Ministry of Finance auctioned 6-month RMB 50 billion deposits at 5.0 percent, 100 bps lower than the last auction of the same tenor in January, which has eased market concerns of liquidity withdrawal," he wrote in an email to clients on Tuesday.

Data on Tuesday showed China's money supply expanded at its weakest pace in more than a decade in March, with analysts saying a fall in the yuan looked to have slowed capital inflows and the build-up of foreign exchange reserves. Broad M2 money supply grew 12.1 percent last month from a year earlier, below a forecast of 13 percent in a Reuters poll.

The growth in total outstanding loans slowed to an eight-year low of 13.9 percent.

Other commonly traded rates also slid. The overnight repo declined to 2.4469 percent from 2.6232 percent, and the 14-day repo sank to 3.2204 percent from 3.6623 percent.

Dealers and economists are currently debating whether weak economic performance in the first quarter will lead Beijing to engage in wider loosening of money conditions, perhaps even more stimulus spending, to prop up growth.

Some predict that regulators will soon cut bank reserve requirement ratios, injecting half a trillion yuan or more into the long-term base money supply, cranking up credit creation to support the economy.

Others predict the opposite, arguing that Beijing was more concerned about reducing sloppy lending and shadow banking than curing short-term economic malaise.

($1 = 6.2191 Chinese Yuan)

(Editing by Jacqueline Wong)

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