Slower global growth prompting officials to relax economic controls

SHANGHAI - China's short-term lending rates slumped on Wednesday, the first trading day of the year.

The benchmark seven-day repo rate fell by 225 basis points, a sign that the money market may see better liquidity in 2012, traders said.

The government is expected to relax its tight liquidity policy this year as China's economic growth slows in line with global weakness, caused mainly by the euro zone's debt crisis, although interest rates are not expected to be reduced soon.

Even so, liquidity conditions will not ease much this month. Money market rates are expected to lead to volatile trading ahead of Spring Festival, which falls in late January this year.

The festival is the biggest holiday in China and markets will be closed for a week starting on Jan 23. Before this period, money usually becomes tight as companies pay staff annual bonuses and shoppers withdraw money for spending and celebrating

Since mid-December, market players have been predicting a reduction in banks' reserve requirement ratios by the People's Bank of China, and traders said the possibility still exists that such a change will be made in January.

"The end of last year permitted money market rates to pull back today, but overall market liquidity conditions remained relatively tight for now," said a trader at a large State-owned bank in Beijing. "But overall, there will be easier money this year."

The end of the year typically sees banks needing more money to balance their sheets or meet regulatory requirements pertaining to loan-to-deposit ratios and similar matters, traders said.

The benchmark weighted-average seven-day bond repurchase rate decreased to 4.0798 percent at midday from a five-month high of 6.3298 percent at the previous close. The market was closed on Monday and Tuesday for a public holiday.

Trading volume in the contract remained at a relatively large 73 billion yuan ($12 billion), although that was down sharply from more than 150 billion yuan in the morning of the previous session, which was the highest last year and reflected year-end cash demand.

The shortest overnight repo rate dropped to 3.5031 percent from 5.0109 percent, while the 14-day repo rate fell to 4.7283 percent from 6.4810 percent.

Premier Wen Jiabao said on Tuesday that China would fine-tune its monetary policy for 2012 as concerns about an economic slowdown intensify, suggesting that the government is ready to shift its policies toward being more supportive of growth.

China's big manufacturers narrowly avoided a contraction in December, a survey showed on Sunday. Even so, risks persist and suggest the second-largest economy in the world will need policy support to counter a slowdown in growth, according to official data issued on Sunday.

Still, Sunday's purchasing managers' index was better than the market had expected, traders said.

That pushed China's interest rate swaps higher on Wednesday. The benchmark five-year interest rate swap increased 14 basis points to 2.94 percent. That was a rebound from its large decrease late this past year, which resulted in part from expectations that monetary policy would be eased, traders said.

Reuters