China money rates steady at low levels, market sees easy money ahead

Tue Feb 19, 2013 11:35pm EST

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* Repo rates inch up but funding remains ample
    * IRS market signals liquidity will stay loose
    * Post-holiday deposit inflows keep funding costs low
    * Little impact from modest c.bank fund withdrawal

    By Gabriel Wildau
    SHANGHAI, Feb 20 (Reuters) - China's money rates inched
higher on Wednesday but remained at low levels, as post-holiday
cash inflows and central bank foreign exchange purchases both
supported liquidity.
    The benchmark weighted-average seven-day bond repurchase
rate inched up to 2.95 percent near midday, up
from 2.91 percent at Tuesday's close. Levels below three percent
typically indicate loose conditions.
    The overnight repo rate remained at rock
bottom levels, trading at around 1.89 percent, barely changed
from 1.88 percent on Tuesday.
    Despite a withdrawal of 860 billion yuan worth of liquidity
this week due to maturing reverse repos, traders say funding
conditions remain comfortable. The central bank drained an
additional 30 billion yuan from the market through sales of
standard repos on Tuesday. 
    The large volume of maturing reverse repos is the result of
the massive injection of short-term funds by the People's Bank
of China in the week just before the Lunar New Year holiday that
began on Feb 9. 
    That was intended to stave off the holiday liquidity crunch
that traditionally occurs as firms and households withdraw cash
to pay for holiday bonuses and consumption.
    But with the customer cash now flowing back into the system,
traders say the maturing of those instruments and the modest
additional withdrawal on Tuesday are doing little to dent
liquidity. Base money creation through central bank purchases of
foreign exchange inflows is also supportive. 
    Interest-rate swaps indicate the market expects rates to
rise slightly but stay low.
    The one-year interest-rate swap fixing was
at 3.11 percent on Wednesday, slightly up from Tuesday's 3.10
percent, but still well below its recent peak of 3.40 on Jan. 4.
        
                                 Current  Prev close  Change
                                       (pct)           (bps)  
7-day repo         2.9498     2.9148     +3.50
7-day SHIBOR           2.9490     2.9490     +0.00 
 Note: Repo rate is weighted average.

    
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    MARKET DRIVERS
    - Monetary policy to be neutral in 2013 
    - External liquidity tracker: Open market operations and
fiscal deposits are the main sources of liquidity in recent
months GRAPHIC: r.reuters.com/das95t
    - Impact of maturing central bank bills and repos GRAPHIC: r.reuters.com/kas95t
    - China's interest-rate swap curve has steepened GRAPHIC: r.reuters.com/has95t
    - China's government bond yield curve has steepened GRAPHIC:
r.reuters.com/jas95t
    - China corporate bond spreads have narrowed slightly 
GRAPHIC: r.reuters.com/mas95t
    - Hot money tracker: Hot outflows may be reducing liquidity,
but the impact is small GRAPHIC: r.reuters.com/was95t
    
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 (Editing by Jacqueline Wong)
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