SHANGHAI, Aug 25 (Reuters) - China's central bank increased short-term fund injections into the financial system on Wedneday, in a bid to soothe market worries over tightening liquidity.
Primary interbank money rates eased after hitting multi-month highs earlier this week, caused by mounting investor concerns over accelerating local government bond supply and higher month-end cash demand.
On Wednesday, the People's Bank of China (PBOC) said it offered 50 billion yuan ($7.72 billion) through seven-day reverse repos into the banking system, whereas it mostly only injected 10 billion yuan each day during the month.
The central bank on its website said the move was to "maintain stable liquidity conditions at the end of the month".
In a separate statement posted on late Tuesday, the PBOC said it would auction another 70 billion yuan worth of one-month cash deposits on Friday.
Traders said although the volume was not huge, the official intention was clear enough to support general liquidity and lift market sentiment.
The volume-weighted average rate of the benchmark overnight repo traded in the interbank market, fell to 2.2025% on Wednesday morning, down 6.6 basis points (bps) from its previous close, which was the highest since June 22.
Meanwhile, the benchmark 10-year treasury futures for December delivery , the most traded contract, rose 0.25%, while China's 10-year government bond yield fell 1.5 bps points to 2.835%.
Ming Ming, head of fixed income research at Citic Securities, expects the central bank to maintain a loosening bias in the near term.
"Against the backdrop of recent credit risk events and tightening regulatory supervision ... in the initial stage when economic downward pressure emerges, the central bank usually maintains stable interbank liquidity with a loosening bias," Ming said.
Still, uncertainty around upcoming local government bond issuance kept the declining interbank rates in check.
Issuance in August has so far risen to about 860 billion yuan, according to Reuters calculations based on official statistics, more than 30% above July's total issuance and not far from this year's high of 875.3 billion yuan in May.
The pace of local government borrowing has been generally slow this year, with a total of about 1.35 trillion yuan issued in the first seven months, around 36% of this year's special bond quota of 3.65 trillion yuan.
Analysts at Guotai Junan expected the overall government bond supply could hit 1.2 trillion yuan in August and 1.28 trillion yuan in September if the government planned to use up all the quota by the end of this year.
"If some infrastructure projects have to rely on the issuance of local government bonds then the government should have an intention to lower bond yields," said Iris Pang, Greater China economist at ING.
"To achieve this, PBOC can cut the required reserve ratio $(RRR)$ by 0.5 percentage points in the fourth quarter of this year."
ING has scaled down its China GDP growth forecasts for the second half of 2021, citing disruptions from micro chip shortages and COVID outbreaks as the two main reasons. It now expects third-quarter growth of 4.5% year-on-year and 5.0% in the fourth quarter.
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