SHANGHAI, Aug 20 — China’s short-term funding costs rose marginally today as regulators made a slew of fund injections into the money market, offsetting a liquidity shortage traders say stems partly from the central bank’s intervention in the foreign exchange market.

Regulators appear to be unwilling to immediately take another major monetary policy easing measure, such as a cut in banks’ required reserve ratios (RRR) or in interest rates.

Traders say that past such steps have put China into a “liquidity trap” in which long-term fund injections become less and less effective to boost the economy due to weak demand.

The volume-weighted average rate of the benchmark seven-day repo traded in the interbank market, considered the best indicator of general liquidity in China, was at 2.56 per cent in late morning trade, up a moderate 2.19 basis points from the previous day’s closing average rate.

The one-day repo was up 1.77 basis points to 1.78 per cent and the 14-day repo was up 3.28 basis points to 2.66 per cent.

The People’s Bank of China (PBOC) injected 120 billion yuan (RM77.085 billion) into the money market on Thursday. This meant that its open market operations this week injected a net 150 billion yuan.

A day earlier, the central bank lent 110 billion yuan via its medium lending facility (MLF) to 14 banks..

And the Ministry of Finance will auction 60 billion yuan of three-month deposits to banks next Tuesday.

“These injections imply that regulators are reluctant to use stronger monetary tools such as an RRR cut,” said a trader at a Chinese state-owned bank in Shanghai.

“However, stronger tools are not excluded from monetary policy choices, and they could still be used if the economy shows further signs of weakness.”

Money market liquidity has tightened since late May partly because of months of intervention by the PBOC in the foreign exchange market in which state banks sold dollars on behalf of the central bank to keep the yuan stable.

The central bank and commercial banks sold a net US$38.9 billion (RM159.755 billion) in foreign exchange in July, the biggest sales on record, indicating intervention to prop up the exchange rate as well as capital outflows.

On Aug. 11, the PBOC surprised markets by devaluing the yuan by nearly 2 per cent. That sparked sharp selling which forced the central bank to come back into the market later in the week through state banks to stabilise the currency.

In the latest sign of a sharp slowdown in the world’s second-largest economy, the ministry of finance posted data on Wednesday showing that profits at China’s state-owned non-financial firms fell 2.3 per cent in the first seven months from a year ago, quickening from a 0.1 per cent decline in the first half. — Reuters