China's money rates stabilised after the central bank resumed open market operations on Tuesday morning for the first time since Oct 15, easing worries that the authorities were preparing to dramatically tighten monetary policy.
The central bank injected 13 billion yuan (S$2.6 billion) into the markets via open market operations. It leaves the People's Bank of China (PBOC) on track to inject a net 13.1 billion yuan into money markets this week barring any offsetting drains at the next open market operations on Thursday.
If so it would mark the first time the PBOC has injected net funds since the week beginning October 7.
The weighted average seven-day repo rate edged down 1 basis point to 4.99 per cent by midday, while the overnight repo rate fell 3 bps to 4.52 per cent, although the 14-day rose 7 bps to 4.76 per cent.
"The PBOC's injection was small and not enough to cover seasonal cash demand at the end of the month," said a trader at a Chinese commercial bank in Shanghai, referring to month-end demand from banks and other financial institutions to meet regulatory requirements such as a loan-to-deposit rate.
"It nevertheless exerted a psychological impact on the market, reassuring traders that regulators will come to the market's rescue in case of extreme need, and this made banks more willing to lend."
On Monday, money market rates reached their highest levels since June's dramatic cash crunch as some market players believed that regulators had signalled they might clamp down on excessive liquidity to get rising property prices and inflation under control.
The rates, however, remained far below the stratospheric levels during the June cash crunch, which set off a panic in financial markets globally. The squeeze saw some intraday quotes for short-term instruments coming in as high as 30 per cent. The seven-day repo rose to over 11 per cent on June 20.
The PBOC had stopped reverse repos to inject money into the markets for three open market operations from October 17 to 24, sparking speculation over a monetary tightening.
But traders said the PBOC appears to just want to send signals that the government is concerned about the excessive liquidity that had fanned rising inflation and home prices in September. It has not indicated any monetary tightening via raises in banks' required reserve ratios or interest rates, which would have a more profound effect on the country's money supply.
"With Tuesday's injection, people are even more confident that the government will not change its neutral monetary policy for now, although the PBOC will stick to its pro-tight stance in managing the liquidity," said a senior trader at a Chinese state-owned bank in Beijing.
"Money rates have the potential to fall to their normal ranges next week when the end-month demand is over," she said, adding the market typically sees a range of 3-4 per cent for the benchmark seven-day repo rate in normal days without seasonal demand.