SHANGHAI liquidity conditions in China's interbank money markets showed signs of stress on Tuesday as seasonal cash demand kicked in, while the central bank's move to lower the amount of cash banks must set aside in order for reserves to come into effect.
The volume-weighted average price of overnight repo traded in the interbank market went to a high of 2.4505 per cent in morning deals, the highest since February 2021, before trading at 2.4290 per cent as of 0803 GMT.
The average volume-weighted seven-day repo price went up by almost 4 basis points to 2.2271 per cent.
Because of demand for funds, higher short-term money rates were driven up, according to traders.
Companies and financial institutions usually have to shore up their cash positions towards the month end and quarter-end for various needs and administrative requirements.
Market watchers said that such tightness was unlikely to last as official liquidity support would take effect soon.
Monetary easing measures will come into effect and may help alleviate tight funding conditions, said Ming Ming, chief economist at Citic Securities.
The People's Bank of China PBOC said it would reduce the reserve requirement ratio RRR for all banks by 25 basis points from March 27.
Analysts at RBC Capital Markets said the market will still need reverse repo operations to smooth the quarter-end funding squeeze.
They said the squeeze is not very obvious looking at the FX market, but they noted that onshore funding costs were high.
There are some speculations that a cut to foreign exchange reserves that banks must hold to relieve pressure because of the dollar funding strains that have resulted in increased onshore dollar borrowing costs.
Since February, the overnight dollar borrowing cost in the onshore interbank market is trading at a premium of nearly 10 basis points to the SOFR, a Libor replacement preferred by the Federal Reserve.