China's key 7-day money rate fell to its lowest level in over a month, shrugging off the central bank's slight drain of funds through open market operations, as traders said fiscal deposits entering the system were pumping in significant liquidity.
The benchmark weighted-average seven-day bond repurchase rate dropped 39.50 basis points to 2.8375 per cent from 3.2325 per cent at the close on Thursday, marking its lowest level since October 22.
Though the central bank drained a net 24 billion yuan ($3.85 billion) from the banking system for the week through open market operations, some traders pointed to large fiscal deposits keeping money supply loose.
A Reuters analysis shows that the Ministry of Finance is likely to draw on deposits of government revenues to pump a record high 1.6 trillion yuan into the system in the last two months of this year.
Fiscal deposits have become a major factor to influence the central bank's monetary policy as well as money markets, said a senior trader at a Chinese state-owned bank in Beijing.
Plentiful money supply has meant that since the start of November, borrowing rates have generally held at a low level, within a narrow trading range between 3.000 and 3.300 per cent.
There is little demand for borrowing. Banks and institutions have enough funds, so the rates stay low and stable, said a trader at a large state-owned bank in Beijing.
The trader added that holding the official rate steady on reverse repos issued by the central bank - which the spot rate tends to follow closely - could also help restrain rates.
The 14-day repo rate climbed slightly to 3.5209 per cent from 3.5008 per cent, and the one-day repo rate edged down to 2.2616 per cent from 2.3211 per cent.
Longer-term tenors remained tighter as traders pointed to an annual spike in demand at the end of the year. The 28-day rate did edge down slightly to 4.000 from 4.0017, but held above its 28-day moving average.
Traders added that rate movements still depended on what the central bank did in its twice-weekly open market operations.
It is hard to say if there will be any increase in volatility, it really depends on open market operations. But I wouldn't expect sharp moves in the coming days, said a trader at Chinese commercial bank in Beijing.