Money market rates stabilize as PBOC moves to boost economy

China's money market rates stabilized on Thursday, with shortest funding costs slipping, after the central bank stepped up efforts to shore up the faltering economy.

The People's Bank of China (PBOC) on Thursday lowered the yield of its bond repurchase agreements in its open market operations for the first time since July.

In open market operations on Thursday, the PBOC lowered the yield for its 14-day repos by 20 basis points to 3.5 percent from Tuesday's 3.7 percent - a sign the central bank is trying to keep market interest rates relatively low. It has kept the yield on the 14-day repos unchanged since late July.

The central bank drained 10 billion yuan from the money markets through 14-day repos on Thursday, but for the week, it will inject a net 8 billion yuan versus a net drain of 5 billion yuan last week.

In the money markets, the weighted average of the benchmark seven-day bond repurchase agreement rose 1 basis point to 3.4 percent on Thursday, while the average of shortest one-day repo rate slipped 1 basis point.

However, the 14-day repo rate, which covers the upcoming peak of fund demand at the end of the quarter, rose 18 basis points to 3.7 percent.

Traders said rates may still have the potential to rise due to pent-up demand for cash at the quarter-end and from a slew of IPOs, and that the PBOC may conduct more and other injections to shore up funds.

The PBC has not confirmed nor denied media reports on Wednesday that it was pumping 100 billion yuan ($16 billion) each into the top five banks via a short-term lending facility. But traders said an abundance of funds in the money markets appeared to point to large cash injections.

The reported move by the PBC helped support global shares and commodities on Wednesday as investors took it as a sign that the country was stepping up its efforts to underpin the economy which is showing signs of slowing growth.

China should avoid cutting interest rates if possible and try other strategies instead to keep the broad measure of money supply or M2, growing at an annual rate of around 13 percent, an adviser to the country's central bank said on Thursday.

Chen Yulu, a member of the central bank's monetary policy committee, said China could use open market operations or selectively cut reserve requirements for some banks to lower borrowing costs.