March 7, 2013 / 5:20 AM / 5 years ago

Key China money rate hits 6-month low, market liquidity abundant

* 7-day repo rate hits 2.52 pct, lowest since Sept
    * PBOC drains small 5 bln yuan in open market operations
    * Signalling moderate tolerance of abundance of money
    * Policy tighter than peak of financial crisis-c.banker

    By Lu Jianxin and Pete Sweeney
    SHANGHAI, March 7 (Reuters) - China's short-term funding
costs tumbled on Thursday, with the benchmark money rate hitting
a six-month low, buoyed by an abundance of liquidity in money
markets partly driven by optimism that foreign capital is
flowing back into the country.
    The weighted-average seven-day bond repurchase rate
 fell 47 basis points to 2.52 percent near midday,
its lowest level since Sept. 4 and down from Wednesday's close
of 2.99 percent.
    The overnight repo rate dropped to 2.48
percent from 2.85 percent, while the 14-day rate 
fell to 3.07 percent from 3.17 percent.
    "Everybody is offering money," said a dealer at a Chinese
commercial bank in Shanghai. "That's probably not due to some
sudden surge of liquidity; I think it is at least partly driven
by optimism about future supply."
    The People's Bank of China (PBOC) said on Monday that it and
Chinese commercial banks bought a net 683.7 billion yuan ($110
billion) worth of foreign exchange in January. 
    The monthly increase was an all-time high, toppling the
previous record of 654 billion yuan recorded in January 2008.
    While the increase does not directly indicate foreign
exchange flows into China, a particularly large rise in such
purchases nevertheless strongly suggests capital inflows.
    Central bank purchases of foreign exchange add to China's
monetary base, increasing market liquidity and influencing
monetary policy. This has allowed the PBOC to largely abstain
from engaging in weekly open market operations. In the past two
weeks it has only issued repos twice, draining 5 billion yuan
($804.10 million) each time. 
    However, PBOC governor Zhou Xiaochuan was quoted on Thursday
as saying that China's monetary policy was now obviously tighter
than at the peak of the global financial crisis.
    While Zhou did not elaborate, the central bank appears to be
trying to dampen too aggressive expectations of capital inflows.
    Yi Gang, a PBOC deputy governor, said on Wednesday that the
central bank would use open market operations, such as forward
repos and central bank bills, to mop up excesses stemming from
forex inflows. 
                                Current  Prev close  Change
                                       (pct)           (bps)  
7-day repo         2.5165     2.9859    - 46.94
7-day SHIBOR           2.5190     2.9980    - 47.90
 Note: Repo rate is weighted average.
    - Monetary policy to be neutral in 2013 
    - External liquidity tracker: Open market operations and
fiscal deposits are the main sources of liquidity in recent
months GRAPHIC:
    - Impact of maturing central bank bills and repos GRAPHIC:
    - China's interest-rate swap curve has steepened GRAPHIC:
    - China's government bond yield curve has steepened GRAPHIC:
    - China corporate bond spreads have narrowed slightly 
    - Hot money tracker: Hot outflows may be reducing liquidity,
but the impact is small GRAPHIC:

 (Editing by Jacqueline Wong)

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