SHANGHAI, Sept 5 — Chinese money market rates fell sharply this week as the heavy demand for funds seen last week, in part linked to a slew of initial public offerings (IPO), faded, traders said.

The abundance of liquidity in the money markets helped push up China’s stock market, which is set to have its best week in a year.

A surprise interest rate cut by the European Central Bank and its outline of a new scheme to push money into the flagging euro zone economy did not have much of an impact, partly because China’s capital account controls slow cash flowing in from outside the country, traders said.

The weighted average rate for the benchmark seven-day bond repurchase agreement stood at 3.19 per cent at midday today, a big drop of 48 basis points from last week’s close.

The overnight repo rate was at 2.81 per cent, losing 11 basis points, while the 14-day repo, another actively traded maturity, plunged 85 basis points on the week to 3.41 per cent.

“Overall market liquidity is good,” said a trader at a Chinese commercial bank in Shanghai. “That means money rates will remain at relatively low levels in the next couple of weeks until the emergence of fresh seasonal demand late in September.”

Last week, eight firms opened IPO subscriptions, which locked up nearly 800 billion yuan (RM414 billion) of funds until early this week. Month-end factors also put pressure on cash demand as Chinese banks needed more funds to meet regulatory requirements such as loan-to-deposit ratios at the end of August.

Helped by cash flowing back into the Chinese markets, the Shanghai Composite Index had jumped 4.4 per cent this week as of midday today and was set for its best week since September last year.

The main stock index was also buoyed by investor optimism over the prospects for economic and market reforms, including the Shanghai-Hong Kong connect, which is expected to be launched in October, allowing investors in the two cities to directly trade in each other’s markets for the first time.

Monetary policy to stay neutral

The People’s Bank of China (PBOC) has increased its liquidity supply this week, putting a net 7 billion yuan into the money markets via open market operations, the fourth straight week of net injections.

The central bank is trying to ensure sufficient liquidity in the system as the world’s second-largest economy has seen a soft spell since July, suggesting more policy support is needed to support growth in the near term.

There is widespread speculation that the PBOC will have to give up on attempts to reform the credit-intensive nature of the financial system to salvage growth. The market, however, expects it will hold the line on injecting cash or reducing lending rates.

The rate swap for the one-year deposit rate was at 2.83 per cent, close to the current 3 per cent interest rate level. — Reuters