* China c.bank injects funds for third straight week
* Conditions now very loose, but uncertainty lies ahead
* Maturing repos will drain massive funds this month
* Political factors delay cut in required reserve ratio
SHANGHAI, Oct 11 China's key money rate held
steady on Thursday, with traders saying interbank liquidity was
now quite loose after a third consecutive week of fund
injections by the central bank.
The central bank injected a net 164 billion yuan ($26.10
billion) this week, compared to the record 365 billion yuan in
the last trading week before the week-long October holiday.
Uncertainty looms over the market, however, due to 704
billion yuan in reverse repos which will mature over the next
two weeks, causing a drain in liquidity.
Absent further net fund injections, traders say conditions
could tighten near the end of next week, as corporate tax
payments based on third-quarter earnings come due on Oct. 15.
"With the impact of tax payments, the next two weeks will be
rather tight, so I think the central bank will have to keep
injecting funds," said an analyst at a large state-owned bank in
While the central bank will likely to be forced to at least
roll over the maturing reverse repos, it could reduce the volume
of its net injections.
"If things stay this loose, rates could fall further. But in
that case I wouldn't rule out the bank cutting back on reverse
repos," said a trader at a major state-owned bank in Beijing.
After plunging 60 basis points on Wednesday, the benchmark
weighted-average seven-day bond repurchase rate
edged higher to 3.1846 percent around midday, up 2 bps from
Wednesday's close but still well below its close of 3.8262
percent on Monday.
The overnight repo rate extended its fall,
dropping 19.84 basis points to 2.4481 around midday, its lowest
level in a month.
Traders and analysts are divided about whether the increased
used of reverse repos since June marks the start of a long-term
shift away from reliance on quantitative tools such as the
reserve requirement ratio (RRR) to manage liquidity.
An alternate view is that the reliance on open market
operations is a stop-gap ahead of the Communist Party Congress
that opens on Nov. 8. Traders say the PBOC wants to avoid taking
dramatic policy steps in the run-up the Congress.
"The political element is pretty important," said the
analyst, referring to the central bank's possible motivation for
relying on reverse repos rather than an RRR cut.
"Without the leadership change, the chances of such a big
move in monetary policy change would be less. They're waiting
for new leadership to set the guiding policy principles before
considering any large-scale adjustments to monetary policy."
Current Prev close Change
7-day repo 3.1846 3.1646 + 2.00
7-day SHIBOR 3.1608 3.1600 + 0.08
Note: Repo rate is weighted average.
($1 = 6.2833 Chinese yuan)
(Editing by Kim Coghill)