March 11, 2014 / 3:35 AM / 3 years ago

China money rates stabilise at lower level after mild drain

SHANGHAI, March 11 (Reuters) - China's money rates stabilised on Tuesday after the People's Bank of China (PBOC) drained 100 billion yuan ($16.29 billion) through 28-day bond repurchase agreements during open market operations.

The weighted average of the benchmark seven-day repo stood at 2.26 percent on Tuesday morning after closing at 2.3017 on Monday. Average rates have not been so low since mid-2012.

The overnight repo and the 14-day repo were also trading in accomodative territory.

"It's still relaxed, extremely relaxed," said a trader at a Chinese municipal bank in Shanghai.

He predicted conditions would remain easy until upcoming tax payments come due in April, putting upward pressure on rates.

"Generally speaking, the PBOC intends to maintain current liquidity conditions due to the slowing economy and mild inflation pressures," wrote Hao Zhou, economist at ANZ Bank in Shanghai.

He pointed out that credit data released on Monday showed a decline in shadow banking activity and slowing loan growth, implying the the central bank can allow liquidity conditions to ease significantly without aggravating inflation or asset bubbles.

The PBOC had previously used short-term money rates to pressure banks and corporations to reduce their participation in the riskier forms of shadow banking activity, which regulators feared were evolving into a major source of opaque systemic risk.

As a result China's money markets saw repeated dramatic cash crunches in June, December and again in January as banks scrambled for cash.

However, signs of weakening exports, slowing growth and softening inflation appear to have provoked Beijing to adjust its cash management strategy and let more cash flow into the system.

This effort is complemented by a drive to introduce more downside risk into the currency market. Traders say the central bank, acting in apparent concert with major state-owned banks, has dumped yuan into the interbank market in order to push down the exchange rate, flushing out speculators.

A side effect of this campaign has been increased liquidity. ($1 = 6.1385 Chinese Yuan) (Additional reporting by Chen Yixin; Editing by Kim Coghill)

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